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Testing for Structural Breaks in the Korean Economy 1980-2005: An Application of the Innovational Outlier and Additive Outlier Models

This paper employs quarterly time series data to endogenously determine the timing of structural breaks for various macroeconomic variables in Korean economy. The Innovational Outlier (IO) as well as Additive Outlier models (Perron, 1997) are then used to test for non-stationarity of the Korean macroeconomic data. After accounting for the single most significant structural break, the results from the (AO) model clearly indicate that the null of at least one unit root cannot be rejected for all of the series under investigation. This finding is consistent with our finding based on the conventional unit root test. However, by applying the IO procedure in the presence of a structural break we find the interesting result that two of the variables under investigation become stationary. The timing of structural breaks for key macroeconomic data under the IO and AO approaches appear to be quite different. Using the IO approach seven of the ten macroeconomic variables focused upon have important structural breaks corresponding with the timing of the Asian financial crisis of 1997. On the other hand, using the AO approach, only one of the ten variables appears to have a structural break related to the Asian financial crisis, while the remaining nine variables have quite diverse structural breaks that depend on key policy changes or other factors contributing to economic turbulence.

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Paper provided by School of Economics, University of Wollongong, NSW, Australia in its series Economics Working Papers with number wp06-09.

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Length: 21 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:uow:depec1:wp06-09
Contact details of provider: Postal: School of Economics, University of Wollongong, Northfields Avenue, Wollongong NSW 2522 Australia
Phone: +612 4221-3659
Fax: +612 4221-3725
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  1. Dan Ben-David & David H. Papell, 1998. "Slowdowns And Meltdowns: Postwar Growth Evidence From 74 Countries," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 561-571, November.
  2. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
  3. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  4. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  5. Banerjee, Anindya & Lumsdaine, Robin L & Stock, James H, 1992. "Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 271-87, July.
  6. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
  7. Christiano, Lawrence J, 1992. "Searching for a Break in GNP," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 237-50, July.
  8. Phillips, Peter C B & Xiao, Zhijie, 1998. " A Primer on Unit Root Testing," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 423-69, December.
  9. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
  10. Mosayeb Pahlavani & Abbas Valadkhani & Andrew C. Worthington, 2005. "The impact of financial deregulation on monetary aggregates and interest rates in Australia," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 1(3), pages 157-163, May.
  11. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
  12. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
  13. Jushan Bai & Pierre Perron, 2003. "Critical values for multiple structural change tests," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 72-78, 06.
  14. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  15. Chan Huh & Sun Bae Kim, 1994. "Financial regulation and banking sector performance: a comparison of bad loan problems in Japan and Korea," Economic Review, Federal Reserve Bank of San Francisco, pages 18-29.
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