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Is there a trend break in U.S. GNP? A macroeconomic perspective

Author

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  • Lutz Kilian
  • Lee E. Ohanian

Abstract

Unit root tests against trend break alternatives are based on the premise that the dating of the trend breaks coincides with major economic events with permanent effects on economic activity, such as wars and depressions. Standard economic theory, however, suggests that these events have large transitory, rather than permanent, effects on economic activity. Conventional unit root tests against trend break alternatives based on linear ARIMA models do not capture these transitory effects and can result in severely distorted inference. We quantify the size distortions for a simple model in which the effects of wars and depressions can reasonably be interpreted as transitory. Monte Carlo simulations show that in moderate samples, the widely used Zivot-Andrews (1992) test mistakes transitory dynamics for trend breaks with high probability. We conclude that these tests should be used only if there are no plausible economic explanations for apparent trend breaks in the data

Suggested Citation

  • Lutz Kilian & Lee E. Ohanian, 1998. "Is there a trend break in U.S. GNP? A macroeconomic perspective," Staff Report 244, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:244
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    Citations

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    Cited by:

    1. Murray, Christian J. & Nelson, Charles R., 2000. "The uncertain trend in U.S. GDP," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 79-95, August.
    2. Abdul Rahman & Samir Saadi, 2007. "Is South Korea's stock market efficient? A note," Applied Economics Letters, Taylor & Francis Journals, vol. 14(1), pages 71-74.
    3. Rahman, Abdul & Saadi, Samir, 2008. "Random walk and breaking trend in financial series: An econometric critique of unit root tests," Review of Financial Economics, Elsevier, vol. 17(3), pages 204-212, August.

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    Keywords

    Gross national product;

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