Are business cycles stationary fluctuations around a deterministic trend? Empirical evidence from 79 developing countries

There is a large literature that tests the univariate time series properties of the real output series following the seminal work of Nelson and Plosser (1982). Whether or not real output is characterized by a unit root process has important implications. A unit root in real output, for instance, is inconsistent with the notion that business cycles are stationary fluctuations around a deterministic trend. In this paper, we investigate the univariate time series properties of real output for 79 developing countries using the conventional augmented Dickey and Fuller (1979) unit root test, the Zivot and Andrews’ (1992) one structural break unit root test, and the Lumsdaine and Papell (1997) two structural breaks unit root test. Our main finding is that, for 40 countries, real output is stationary around a trend. This indicates that business cycles are stationary fluctuations around a deterministic trend for only 51% of the developing countries in our sample.     

Revisiting purchasing power parity for African countries: with nonlinear panel unit-root tests

This study applies Panel Seemingly Unrelated Regressions (SUR) Kapetanios et al. (Kapetanios–Shin–Snell (KSS), SURKSS) tests, proposed by Wu and Lee (2009), to investigate the properties of long-run Purchasing Power Parity (PPP) in 15 African countries. The empirical results from the univariate unit root and panel based unit root tests indicate that PPP does not hold for these 15 countries under study. However, Panel SURKSS tests indicate that PPP is valid for four of these 15 countries. These results have important policy implications for these 15 African countries under study.     

Long run time series tests of constant steady-state growth

We propose a new methodology to study the stability of steady-state growth. Long-run GDP per capita can be characterized by: (1) the linear trend hypothesis, where there are no long-run changes in GDP levels or growth rates, (2) the level shift hypothesis, where there are long-run level shifts, but not changes in growth rates, and (3) the growth shift hypothesis, where there are long-run changes in both GDP levels and growth rates. We formally test these hypotheses using time series techniques with over 139 years of data. The results are not favorable to the hypothesis of constant steady-state growth. While we find evidence supporting the linear trend hypothesis for the United States and Canada and the level shift hypothesis for three additional OECD countries, the growth shift hypothesis is supported for seven OECD and four Asian countries. The results are not driven by transition dynamics.     

Smooth transition trends and labor force participation rates in the United States

This paper employs smooth transition trend models to investigate the long-run time series behavior of quarterly US labor force participation rates. In particular, we examine whether long-run growth in labor force participation rates can be modeled by smooth transitions between states rather than as abrupt mean level changes or as a stochastic trend. Smooth transitions permit for non-instantaneous adjustment of individual workers to changes associated with economic events or general labor market conditions. We employ unit root testing procedures with alternatives characterized by stationary fluctuations around one or two smooth transitions in linear trend. We examine labor force participation rates by gender- and age-specific groups. The results indicate that all female and most male participation series are better characterized as stationary processes that undergo transitional deterministics.     

OECD unemployment: structural breaks and stationarity

The paper is concerned with testing the unemployment rate of twenty two OECD countries for stationarity. A sequential testing procedure was applied where the break data is endogenized. Three different models were tested for unit roots. It was found that the ‘crash’ model, which allows for a shift in the level of the unemployment rate, was most relevant. Furthermore, most breaks were associated with the first oil price shock. Results suggest that in nine countries the unit root can be rejected, in ten countries the null hypothesis cannot be rejected and in three cases the results suggest possible trend stationarity.     

Effects of financial liberalization on financial market development and economic performance of the SSA region: An empirical assessment

This study investigates the role of financial liberalization in promoting financial deepening and economic growth in Sub-Saharan African countries (SSA). We apply the more efficient system GMM estimator in dynamic panel data that combines first difference and original level specification to deal with the problems of weak instruments. Our dataset covers 21 countries in Sub-Saharan Africa over the period of 1981–2009.Additionally, the paper sought to examine both the direct and indirect impacts of financial liberalization policies on economic growth and financial deepening using a much more comprehensive and recent financial liberalization dataset. The econometric results suggest that, on average, financial liberalization is negatively associated with income growth in SSA region. Our findings provide support for the skeptical empirical view of financial liberalization in emerging markets, which show that liberalization, by itself, might be associated with lower economic growth through leading to destabilization, stimulating domestic capital flight and increasing the risk of financial fragility. However, the research finds that financial liberalization does indeed impact positively on financial deepening and resource mobilization in SSA region, after controlling for key macroeconomic factors such as institutional quality, fiscal imbalances and inflation. In fact the study reports a stronger reforms effect for countries that have stronger legal institutions, protection of property rights and higher human capital. Policy-wise, the study finds that institutional and human capital factors are important in explaining growth and financial development; therefore, it is necessary for SSA governments to promote a stronger and more transparent institutional development as we move forward.     

Quantile unit root test and the PPP in Africa

In this study, we apply the Quantile unit root test and revisit the Purchasing Power Parity (PPP) in 20 African countries using real effective exchange rates over the period 1971Q1 to 2012Q4. While traditional unit root tests fail to reject unit root hypothesis in most of the countries, results from Quantile unit root test reject unit root null hypothesis in Ghana, Mauritius, Niger, South Africa, and Togo, providing support for the PPP at least in these five countries. We further estimate the half-life based on Quantile autoregressive (QAR) model to be about 4.57–7.96 quarters (1–2 year).     

Do Financial and Institutional Variables Enhance the Impact of Remittances on Economic Growth in Latin America and the Caribbean? A Panel Cointegration Analysis

Using recently developed panel unit root and panel cointegration tests and the Fully-Modified OLS methodology (FMOLS), this paper estimates the impact of remittances on the economic growth of selected upper and lower income Latin American & Caribbean (LAC) countries over the 1990–2007 period. Despite the large flow of remittances to the region, there have been relatively few empirical studies assessing the impact of remittances on economic growth in LAC. Panel unit root tests suggest that several of the macro variables included in the model exhibit unit roots, yet, at the same time, Pedroni’s panel cointegration test determined that there is a cointegrating relationship among the variables in the estimated model. The FMOLS estimates suggest that remittances have a positive and significant effect on economic growth in both groups of countries. The estimates also indicate that both the degree of economic freedom and credit provided by the banking system have a positive and significant effect on economic growth in upper (middle) income LAC countries. The sign of the interaction term between remittances and the credit (and EFI) variables suggest that remittances act as substitutes for these variables. Finally, the effect of remittances on both sets of countries is stronger in the presence of a financial (credit) variable.     

DO REAL INTEREST RATES REALLY CONTAIN A UNIT ROOT? MORE EVIDENCE FROM A BOOTSTRAP COVARIATE UNIT ROOT TEST

This paper re‐examines the empirical finding that international real interest rates usually have a unit root. This conclusion is put forth in Rapach and Weber (2004 ), using the Ng and Perron (2001 ) tests. We use Rudebusch's (1993 ) approach to construct the small sample distributions of the Ng and Perron tests, and calculate their asymptotic sizes, size‐adjusted powers and rejection rates. These numbers show that the lack of power in the Ng and Perron tests might account for the findings of Rapach and Weber (2004 ): that the unit root null cannot be rejected for most OECD countries. Size distortions are mild in the case of Ng and Perron tests for two series, but are serious for the Phillips and Perron Z‐test on inflation rates. We then apply a powerful covariate augmented Dickey–Fuller unit root test to examine the series for which stationarity cannot be determined with the Ng and Perron tests. The bootstrap technique is also used to control possible size distortions. In contrast to the results of Rapach and Weber (2004 ), the bootstrap covariate augmented Dickey–Fuller test yields striking evidence that real interest rates are stationary for 14 of 16 OECD countries, because nominal interest rates are stationary for the 14 countries, while inflation rates are stationary for all countries.     

Testing for fiscal sustainability: New evidence from the G-7 and some European countries

Whether or not a government deficit is sustainable has important implications for policy. If the debt of a nation is sustainable, then it implies that the government should have no incentive to default on its internal debt. In this article we examine whether or not the debt-GDP ratios of the G-7 and some European countries can be characterized by a unit root process with the non-linear trend and asymmetric adjustment. The econometric methodology allows us to determine whether the stationarity holds for the government's debt–GDP ratio after considering the non-linear trend. Among the main results, it is found that it is very likely that the debt–GDP ratios of Canada, Germany, the US and Italy are stationarity after taking account of the non-linear trend in the long run. Nevertheless, it is model-dependent for the debt–GDP ratios of these countries to be asymmetrically adjusted after taking the non-linear trend into consideration.     

Capital flows and economic growth revisited: evidence from five Sub-Saharan African countries

The study examines the differential effects of capital flows on economic growth in five Sub-Saharan African (SSA) countries over the period 1970–2014. Using the autoregressive distributed lag methodology, the findings show that in the long-run capital flows (i.e. foreign direct investment (FDI), aid, external debt, and remittances) have different effects on economic growth. FDI has a significant positive effect in Burkina Faso and negative effects in Gabon and Niger whereas the impact of debt is negative in all countries. Aid, however, promotes growth in Niger and Gabon whiles it deters growth in Ghana. Remittances, on the other hand, have a significant positive effect in Senegal. Finally, gross capital formation is significant in most of the countries and the impact of trade is mixed. These results suggest that the benefits of capital flows in SSA have been overemphasized.     

The oil price shocks and the unit root hypothesis: the UK experience

Critics of the standard Dickey–Fuller and augmented Dickey–Fuller tests for unit roots argue that when there have been significant structural breaks during the sample period, these tests are often biased toward acceptance. Allowing for a one-time change in the slope of the trend function often leads to rejection of the unit-root hypothesis which implies that business cycles are temporary fluctuations around a stable but possibly shifting trend path. The validity of the unit root hypothesis in connection with the two oil crises in the seventies is re-examined using quarterly time-series data for a set of UK macroeconomic series. The empirical evidence presented supports the view that only those shocks associated with the oil price crises had a persistent effect on the UK economy.     

Is health care really a luxury in OECD countries? Evidence from alternative price deflators

This article examines whether real Health-care Expenditure (HE) is a luxury or necessity for Organization for Economic Co-operation and Development (OECD) countries over the period 1972 to 2004 within a panel unit root and panel cointegration framework. To realize this objective, we regress HE on real Gross Domestic Product (GDP), the proportion of the population aged over 65 (P65) and a time trend (T). We first present results for 18 countries where real HE per capita is obtained using a general GDP deflator. For these countries, we find that health care is a luxury for just one country. Next, we present results for eight countries where real HE is obtained using a specific health-care price index. When the general GDP deflator is replaced with a specific health-care price index, at least one of the GDP, P65 or T coefficients for the eight countries changes in a reasonably dramatic fashion, suggesting that the use of the GDP deflator introduces bias into the regression. We find that HE is a necessity in all eight countries. Given that the reliability of the GDP deflator results is questionable, on the basis of the results for the eight countries, we conclude that HE is a necessity.     

Heterogeneous technology and the technological catching-up hypothesis: Theory and assessment in the case of MENA countries

Long run convergence implies that the convergence hypothesis will be rejected if the income differential is not stationary. However, this definition is valid only if the catching-up process between the two countries is already over. If we take into account catching-up dynamics, then poorest countries should obtain a faster growth than developed countries. Thus, income gaps should integrate decreasing time trends. We formalise this hypothesis theoretically using a stochastic neoclassical growth model with heterogeneous technology. We then apply this model to the issue of per-capita GDP catching-up of eight MENA countries towards the level of income in Europe. We approximate the nonlinear deterministic trend by a linear function with breaks and apply panel unit root tests with breaks. The analysis reveals firstly that the periods of divergence outnumber the periods of convergence. Secondly, since the year 2000 all countries but Syria have been converging toward the European per-capita income level.     

ARE OUTPUT FLUCTUATIONS TRANSITORY? NEW EVIDENCE FROM 24 CHINESE PROVINCES

Abstract. The fact that an occurrence of a unit root in real output is inconsistent with the notion that business cycles are stationary fluctuations around a deterministic trend makes this an important topic for empirical investigation. We examine this issue for 24 Chinese provinces using the recently developed Lagrange multiplier panel unit root test which allows for a structural break. Our main finding is that real gross domestic product (GDP) and real GDP per capita for Chinese provinces are stationary fluctuations around a deterministic trend.     

Non-linear quantile unit root test and PPP: more evidence from Africa

It is now a common practice to establish stationarity of the real exchange rate as a sign of purchasing power parity (PPP) hypothesis. In this article, we consider the real effective exchange rates of 29 African countries. When we apply conventional linear unit root tests, we find support for the PPP in eight countries. However, when we shift to the newly introduced non-linear quantile unit root test, support for the PPP increases to 15 countries.     

City CPI Convergence in Mexico

This paper tests the purchasing power parity hypothesis within a single developing country currency area: Mexico. This work stems from research in comparing price movements across countries and a growing literature on price dynamics within a single currency area. The author uses city Consumer Price Index data for 34 cities in Mexico over the period 1982–2000. He followed the standard procedure of testing for I(1) processes in relative city prices, or city real exchange rates, using univariate and panel unit root tests. The main results of the paper are: First, Mexican city relative prices are stationary—the data rejects the hypothesis that city real exchange rates contain a random walk, but only using panel unit root techniques. Finally, regional demand and supply homogeneity implies stronger evidence for price parity within regions, while there is considerable evidence of regional price convergence, regional homogeneity does not guarantee faster convergence.     

The Feldstein–Horioka Puzzle and structural breaks: Evidence from EU members

The purpose of this paper is to investigate the level of capital mobility in European Union members using the Feldstein–Horioka puzzle proposed by Feldstein and Horioka (1980) in order to investigate relations between saving and investment flows. In this paper, data for 23 European countries were used over the period of 1995–2009 on the quarterly basis. Two different tests were used to estimate the stationarity of the model variables, which are the Ng and Perron (2001) unit root test procedure and approach proposed by Zivot and Andrews (1992) for unit root test allowing for a structural shift. Then the Kejriwal and Perron (2008, 2010) structural break test was applied to determine the presence of structural breaks in series. In most countries except Belgium and Finland UDmax and WDmax tests rejected the hypothesis of no breaks. To test the cointegration relationships between investment and saving flows of European Union members three different cointegration techniques were applied to the data. Firstly, the Johansen (1988) cointegration approach was used for the case of no cointegration shifts, then the Gregory and Hansen (1996) cointegration test was applied, which allows for one structural shift. Finally, again the Johansen' cointegration approach was used; however, this time with the inclusion of dummy variables related to earlier selected structural break locations. The empirical results provided stronger evidence of cointegration between investment and saving variables in the case of structural break accommodation compared to the case where the presence of structural breaks was ignored. The estimated saving retention coefficient in the presence of structural breaks using the Kejriwal and Perron (2008, 2010) approach appeared relatively low in many cases, illustrating by this the openness of estimated countries. In general, world and European countries with time have a tendency to a higher level of their capital market openness. Estimations of a saving retention coefficient in the presence of structural changes do not support the existence of the Feldstein–Horioka Puzzle in the considered EU countries, except Belgium.