Because of the fixed heterogeneity of their models, most panel unit root tests impose restrictions on the rate at which the number of time periods, T, and the number of rosssection units, N, go to infinity. A common example of such a restriction is N/T → 0, which in practice means that T >> N, a condition that is not always met. In the current paper the heterogeneity is given a parsimonious random effects specification, which is used as a basis for developing a new likelihood ratio test for a unit root. The asymptotic analysis shows that the new test is valid for all (N, T) expansion paths satisfying N/T5 → 0, which represents a substantial improvement when compared to the existing fixed effects literature.
Taylor & Francis.