Panel unit root tests under cross-sectional dependence Jo ¨rg Breitung and Samarjit Das* University of Bonn, Institute of Econometrics, Adenauerallee 24-42, 53113 Bonn, Germany In this paper alternative approaches for testing the unit root hypothesis in panel data are considered. First, a robust version of the Dickey-Fuller t-statistic under contemporaneous correlated errors is suggested. Second, the GLS t-statistic is considered, which is based on the t-statistic of the transformed model. The asymptotic power of both tests is compared against a sequence of local alternatives. To adjust for short-run serial correlation of the errors, we propose a pre-whitening procedure that yields a test statistic with a standard normal limiting distribution as N and T tends to infinity. The test procedure is further generalized to accommodate individual specific intercepts or linear time trends. From our Monte Carlo simulations it turns out that the robust OLS t-statistic performs well with respect to size and power, whereas the GLS t-statistic may suffer from severe size distortions in small and moderate sample sizes. The tests are applied to test for a unit root in real exchange rates. Key Words and Phrases: unit root test; panel data; cross section dependence. 1 Introduction Over the past decade the problem of testing for unit roots in panel data has attracted a great deal of attention. Most of this literature assumed that the individual time series in the panel were cross-sectionally independently distributed. Obviously, this is a rather restrictive assumption, particularly in the context of cross country regressions. In traditional panel data analysis cross-section *The research for this paper was carried out within research project ÔÔUnit roots and cointegration in panel dataÕÕ financed by the German Research Association (DFG). We would like to thank Ana-Maria Furtes, Uwe Hassler, Hashem Pesaran, Adina Tarcolea, and the participants of the Workshop on Recent Developments in the Econometrics of Panel Data (London, March 2004) for their comments and suggestions. Furthermore, we are greatly indebted to the referees for their very helpful comments and suggestions.  breitung@uni-bonn.de 414 Statistica Neerlandica (2005) Vol. 59, nr. 4, pp. 414–433 Ó VVS, 2005. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.