PANIC in the Presence of Uncertainty about the Deterministic Trend


  • Previous versions of this article were presented at the 5th Nordic Econometric Meeting in Lund and at a seminar at Lund University. The authors would like to thank seminar participants and in particular Anindya Banerjee, David Edgerton, Randi Hjalmarsson, Matthew Lindquist, Peter Lindström, Hashem Pesaran and two anonymous referees for may valuable comments and suggestions. The authors gratefully acknowledge financial support from the Jan Wallander and Tom Hedelius Foundation, research grant numbers W2006–0068:1 and P2009–0189:1.


Most macroeconomic and financial panel variables are trending. However, because of the well-known power problem in the presence of incidental trends, many researchers gamble that their unit root test regressions can be ran without such trends, thereby running the risk of obtaining spurious results. This article takes one of the most general and popular panel unit root tests, known as PANIC, and shows how it can be modified to account for the uncertainty regarding the deterministic trend.