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Improved Unit Root Tests with Changes in the Intercept

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  • Claude Lopez

Abstract

The present paper suggests a set of unit root tests allowing up to two changes in the intercept, within the local-to-unity framework. The truncation lag and the break date are selected endogenously. The finite sample critical values are tabulates and Monte carlo experiments are used to analyze the tests' behavior. Three main outcomes can be derived from the finite sample properties of the test: (i) the test performs better if the local-to-unity parameter is non-zero, (ii) it compares well with the commonly used Perron and Vogelsang (1992) and Clemente et al (1998) and (iii) it performs particularly well when the data is higly persistent and/or the data of limited span. The new tests are then used to investigate European inflation rates. Our results show strong evidence of (regime-wise) stationarity for all series.

Suggested Citation

  • Claude Lopez, 2005. "Improved Unit Root Tests with Changes in the Intercept," University of Cincinnati, Economics Working Papers Series 2005-04, University of Cincinnati, Department of Economics, revised 2006.
    • Handle: RePEc:cin:ucecwp:2005-04
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    References listed on IDEAS

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    1. Markku Lanne & Helmut Lütkepohl & Pentti Saikkonen, 2003. "Test Procedures for Unit Roots in Time Series with Level Shifts at Unknown Time," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(1), pages 91-115, February.
    2. Perron, Pierre & Vogelsang, Timothy J., "undated". "Level Shifts and Purchasing Power Parity," Instructional Stata datasets for econometrics levshift, Boston College Department of Economics.
    3. Saikkonen, Pentti & Lütkepohl, Helmut, 2002. "Testing For A Unit Root In A Time Series With A Level Shift At Unknown Time," Econometric Theory, Cambridge University Press, vol. 18(2), pages 313-348, April.
    4. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
    5. Burridge, Peter & Taylor, A M Robert, 2000. "On the Power of GLS-Type Unit Root Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(5), pages 633-645, December.
    6. Perron, Pierre & Vogelsang, Timothy J, 1992. "Nonstationarity and Level Shifts with an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 301-320, July.
    7. Clemente, Jesus & Montanes, Antonio & Reyes, Marcelo, 1998. "Testing for a unit root in variables with a double change in the mean," Economics Letters, Elsevier, vol. 59(2), pages 175-182, May.
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    Cited by:

    1. Lopez, Claude & Papell, David H., 2012. "Convergence of Euro area inflation rates," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1440-1458.
    2. Brittle, Shane, 2009. "Ricardian Equivalence and the Efficacy of Fiscal Policy in Australia," Economics Working Papers wp09-10, School of Economics, University of Wollongong, NSW, Australia.
    3. Claude Lopez & Javier Reyes, 2009. "Stationary properties of the real interest rate and the per-capita consumption growth rate: empirical evidence for theoretical arguments," Applied Economics, Taylor & Francis Journals, vol. 41(13), pages 1643-1651.
    4. repec:ipg:wpaper:2014-047 is not listed on IDEAS
    5. Lopez, Claude, 2009. "GLS-detrending and regime-wise stationarity testing in small samples," Economics Letters, Elsevier, vol. 104(2), pages 99-101, August.

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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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