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Beware of econometricians bearing estimates: Policy analysis in a “unit root” world

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  • Menzie David Chinn

    (Assistant Professor of Economics at the University of Califormia, Santa Cruz)

Abstract

Current statistical approaches to modeling many economic relationships are grounded in traditional ideas of deterministic trends. Some of the failures of these approaches are due to inappropriate models using time series with “unit roots.” After a shock, unit root processes do not revert to some time trend, but rather can drift up or down without bounds. A “random walk” is a well-known example of a unit root process. The purpose of this paper is to explain the importance of unit root processes to policy analysts who make or rely upon econometric models using time series dat. In particular, the presence of unit root processes in GNP, energy and electricity consumption exports, imports, and other variables suggests that modifications to the way economic relationships are estimated may be necessary. Once these modifications are made, many important parameters turn out to be much different, with substantive implications for both forecasting and policy.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Policy Analysis and Management.

Volume (Year): 10 (1991)
Issue (Month): 4 ()
Pages: 546-567

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Handle: RePEc:wly:jpamgt:v:10:y:1991:i:4:p:546-567

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Web page: http://www3.interscience.wiley.com/journal/34787/home

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Cited by:
  1. Menzie D. Chinn, 2004. "Incomes, Exchange Rates and the US Trade Deficit, Once Again," International Finance, Wiley Blackwell, vol. 7(3), pages 451-469, December.
  2. Louis D. Johnston & Menzie D. Chinn, 1996. "How well is the United States competing? A comment on Papadakis," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 15(1), pages 68-81.

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