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Testing for Unit Roots with Stationary Covariates

Author

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  • Elliott, Graham
  • Jansson, Michael

Abstract

We derive the family of tests for a unit root with maximal power against a point alternative when an arbitrary number of stationary covariates are modeled with the potentially integrated series. We show that very large power gains are available when such covariates available. We then derive tests which are simple to construct (involving the running of vector autoregressions) and achieve at a point the power envelopes derived under very general conditions. These tests are excellent properties in small samples. We also show that these are obvious and internally consistent tests to run when identifying structural VAR's using long run restrictions.

Suggested Citation

  • Elliott, Graham & Jansson, Michael, 2002. "Testing for Unit Roots with Stationary Covariates," Department of Economics, Working Paper Series qt4v35s2gv, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    • Handle: RePEc:cdl:econwp:qt4v35s2gv
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    Keywords

    unit roots; power envelopes; structural vector autoregressions;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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