Mean group tests for stationarity in heterogeneous panels

This paper proposes a panel-based mean group test for the null of stationarity against the alternative of unit roots in the presence of both heterogeneity across cross-section units and serial correlation across time periods. Using both sequential and joint asymptotic analyses the proposed test statistic is shown to be distributed as standard normal under the null for large N (number of groups) and large T (number of time periods). Monte Carlo results support the use of joint asymptotic limits (under the further condition that N/T -> 0) as a guide to finite sample performance, but also clearly indicate that the power of our suggested panel-based test is substantially higher than that of the single time-series-based test.