Unit Roots, Trend Breaks, And Transitory Dynamics: A Macroeconomic Perspective
There is a widespread tendency in the applied time series literature to interpret rejections of the unit root null hypothesis in favor of a trend stationary process with possible trend breaks as evidence that the data are better characterized as stationary about a broken trend. This interpretation is valid only if the model postulated under the alternative hypothesis is the only plausible alternative to the model postulated under the null. We argue that this implicit assumption is often questionable. There are economically plausible models that are not well captured either under the null hypothesis or under the alternative hypothesis of these tests. We show that applied researchers who ignore this possibility are likely to reject the unit root null with high probability in favor of a trend stationary process with possible breaks. The main contribution of this paper is to provide evidence that this potential pitfall is both economically relevant and quantitatively important. We also explore to what extent applied users may mitigate inferential errors by using finite-sample and bootstrap critical values.
(This abstract was borrowed from another version of this item.)
Volume (Year): 6 (2002)
Issue (Month): 05 (November)
|Contact details of provider:|| Postal: |
Web page: http://journals.cambridge.org/jid_MDYEmail:
When requesting a correction, please mention this item's handle: RePEc:cup:macdyn:v:6:y:2002:i:05:p:614-632_01. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.