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Testing for a Deterministic Trend when there is Evidence of Unit-Root

  • Manuel Gomez


    (Department of Economics and Finance, Universidad de Guanajuato)

  • Daniel Ventosa-Santaularia


    (Department of Economics and Finance, Universidad de Guanajuato)

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    Whilst the existence of a unit root implies that current shocks have permanent effects, in the long run, the simultaneous presence of a deterministic trend obliterates that consequence. As such, the long-run level of macroeconomic series depends upon the existence of a deterministic trend. This paper proposes a formal statistical procedure to distinguish between the null hypothesis of unit root and that of unit root with drift. Our procedure is asymptotically robust with regard to autocorrelation and takes into account a potential single structural break. Empirical results show that most of the macroeconomic time series originally analyzed by Nelson and Plosser (1982) are characterized by their containing both a deterministic and a stochastic trend.

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    File Function: Revised version, 2010
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    Paper provided by Universidad de Guanajuato, Department of Economics and Finance in its series Department of Economics and Finance Working Papers with number EM200801.

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    Length: 19 pages
    Date of creation: Feb 2008
    Date of revision: Jun 2010
    Handle: RePEc:gua:wpaper:em200801
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