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Testing for Structural Breaks in the Korean Economy 1980-2005: An Application of the Innovational Outlier and Additive Outlier Models

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    Abstract

    This paper employs quarterly time series data to endogenously determine the timing of structural breaks for various macroeconomic variables in Korean economy. The Innovational Outlier (IO) as well as Additive Outlier models (Perron, 1997) are then used to test for non-stationarity of the Korean macroeconomic data. After accounting for the single most significant structural break, the results from the (AO) model clearly indicate that the null of at least one unit root cannot be rejected for all of the series under investigation. This finding is consistent with our finding based on the conventional unit root test. However, by applying the IO procedure in the presence of a structural break we find the interesting result that two of the variables under investigation become stationary. The timing of structural breaks for key macroeconomic data under the IO and AO approaches appear to be quite different. Using the IO approach seven of the ten macroeconomic variables focused upon have important structural breaks corresponding with the timing of the Asian financial crisis of 1997. On the other hand, using the AO approach, only one of the ten variables appears to have a structural break related to the Asian financial crisis, while the remaining nine variables have quite diverse structural breaks that depend on key policy changes or other factors contributing to economic turbulence.

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    File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@econ/documents/doc/uow012222.pdf
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    Bibliographic Info

    Paper provided by School of Economics, University of Wollongong, NSW, Australia in its series Economics Working Papers with number wp06-09.

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    Length: 21 pages
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:uow:depec1:wp06-09

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    Keywords: structural break; unit root test; and Korean economy;

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    1. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
    2. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
    3. Ben-David, D. & Papell, D.H., 1996. "Slowdowns and Meltdowns: Post-War Growth Evidence from 74 Countries," Papers 9-96, Tel Aviv.
    4. Chan Huh & Sun Bae Kim, 1994. "Financial regulation and banking sector performance: a comparison of bad loan problems in Japan and Korea," Economic Review, Federal Reserve Bank of San Francisco, pages 18-29.
    5. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Universite de Montreal, Departement de sciences economiques.
    6. Phillips, Peter C B & Xiao, Zhijie, 1998. " A Primer on Unit Root Testing," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 423-69, December.
    7. Christiano, Lawrence J, 1992. "Searching for a Break in GNP," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 237-50, July.
    8. Anindya Banerjee & Robin L. Lumsdaine & James H. Stock, 1990. "Recursive and Sequential Tests of the Unit Root and Trend Break Hypothesis: Theory and International Evidence," NBER Working Papers 3510, National Bureau of Economic Research, Inc.
    9. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
    10. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
    11. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
    12. Jushan Bai & Pierre Perron, 2003. "Critical values for multiple structural change tests," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 72-78, 06.
    13. Mosayeb Pahlavani & Abbas Valadkhani & Andrew C. Worthington, 2005. "The impact of financial deregulation on monetary aggregates and interest rates in Australia," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 1(3), pages 157-163, May.
    14. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    15. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
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