Likelihood ratio tests for a unit root in panels with random effects

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 cross-section units, N, go to infinity. A common example of such a restriction is (Formula presented.), which in practice means that (Formula presented.), 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 (Formula presented.) expansion paths satisfying (Formula presented.), which represents a substantial improvement when compared to the existing fixed effects literature.