Are GDP fluctuations transitory or permanent in African countries? Sequential Panel Selection Method

The purpose of this study is to examine whether GDP shocks are transitory or permanent in African countries. The Sequential Panel Selection Method (SPSM) using Panel KSS test with a Fourier function—which is good enough to control for structural breaks and nonlinearity as well as cross-section dependency and heterogeneity is applied to per capita real GDP data for 52 African countries for the period 1969 to 2011. The SPSM classifies the whole panel into a group of stationary series and a group of non-stationary series that is very suitable to identify how many and which series in the panel are stationary processes. The empirical results from several conventional unit root tests indicate that the per capita real GDP for the countries are non-stationary, however, when the SPSM using the Panel KSS unit root test with a Fourier function is conducted, we find that the per capita real GDP are stationary in 50 out of the 52 African countries. Besides, we indicate that allowing for nonlinearities and structural breaks in the series results in more rejection of the null of unit root hypothesis. Our results thereby point out to the importance of the proper modeling of both structural breaks and nonlinearities in real output levels of developing countries. The findings imply that GDP fluctuations in African countries are overall transitory and they provide important policy implications for African countries.