Nonstationarity and Nonlinearity in the US Unemployment Rate: A Re-examination
Conventional econometric tests cannot distinguish nonstationarity from nonlinearity because of the joint modeling of unit roots with threshold effects. Caner–Hansen (CH, 2001) provides a new test which for the first time can simultaneously test for both (without any prior assumption of stationarity). Their threshold unit root tests are more powerful than conventional Augmented Dickey-Fuller tests, especially when the true process is nonlinear. They look at unemployment among adult males, and find contrary to many previous studies, that it is a “stationary nonlinear threshold process”. This paper attempts to re-examine and reconfirm the CH methodology by using unemployment in the civilian labor force. We extend the data up to December 2004, to see if the results hold up to the recent turbulent times, when unemployment changed dramatically from 3.9 % (1999) to 6.2 % (2003). Our results support the premise that US unemployment is a stationary threshold autoregressive process.
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