What Macroeconomists Should Know about Unit Roots: A Bayesian Perspective

This paper summarizes recent Bayesian research on unit roots for the applied macroeconomist in the way Campbell and Perron [8] summarized the classical unit roots perspective. The appropriate choice of a prior is discussed. In recognizing a consensus distaste for explosive roots, I find the popular Normal-Wishart priors centered at the unit root to be reasonable provided they are modified by concentrating the prior mass for the time trend coefficient toward zero as the largest root approaches unit from below. I discuss that the tails of the predictive density can be sensitive to the prior treatment of explosive roots. Because the focus of an investigation often is on a particular persistence property or medium-term forecasting property of the data, I conclude that Bayesian methods often deliver natural answers to macroeconomic questions.