Trend breaks and non-stationarity in the Yugoslav black market for dollars, 1974–1987

We estimate a model of the black market premium for dollars in Yugoslavia from 1974 to 1987. Unlike previous applications of the model, our analysis addresses non-stationarity in the underlying data by allowing for trend breaks. Endogenous structural break tests indicate the presence of breaks closely associated with the death of Tito and changes in laws affecting the operation of the black market. After accounting for these breaks, we find strong support for the underlying model. In addition, we find evidence consistent with the era of increased government involvement in the black market leading to greater volatility of the premium following regime change.     

Convergence in West German Regional Unemployment Rates

Abstract. Differences in regional unemployment rates are often used to describe regional economic inequality. This paper asks whether changes in regional unemployment differences in West Germany are persistent over time. Understanding the persistency of regional unemployment differences helps us to assess how effective regional policy can be. While univariate tests suggest that changes in regional unemployment differences are persistent in West Germany, more powerful panel tests lend some support to the hypothesis that regional unemployment rates converge. However, these tests reveal a moderate speed of convergence at best. Because there is a structural break following the second oil crisis, we also use tests that allow for such a break. This provides evidence for both convergence and quick adjustment to an equilibrium distribution of regional unemployment rates that is, however, subject to a structural break.     

Labor productivity forecasts based on a Beveridge–Nelson filter: Is there statistical evidence for a slowdown?

In this paper, I assess the evidence for a structural break in labor productivity growth in the years before the Great Recession with the use of out-of-sample forecasting exercises for the years 2010 to 2019 and the recently developed Beveridge–Nelson filter. Models based on a Beveridge–Nelson filter with no structural breaks outperform those allowing for a structural break, and there is statistically significant evidence that they outperform the random walk, though all models were too optimistic about labor productivity growth. Recently developed statistical tests do point to the presence of a structural break before the Great Recession, but uncertainty about the data-generating process for labor productivity growth or the timing and magnitude of the break may be too great to be helpful in forecast preparation.     

Structural Changes in High Dimensional Factor Models

This paper provides a survey on recent developments in structural changes for high dimensional factor models. Compared with conventional low-dimensional time series, structural changes in factor models are more complicated due to the unobservability of factors and factor loadings. The following topics are covered in this survey: the identification conditions for the structural changes in the factor loadings, different impacts of big and small breaks in factor models, tests for structural changes in the factor loadings of a specific variable, tests for structural changes in the factor loading matrix, joint tests for structural changes in the factor loadings and coefficients in factor-augmented regressions, tests for smooth changes in the factor loadings, estimation of break dates, and model selection in factor models with structural changes via the shrinkage method.     

Tests of the CAPM under structural changes

Abstract

In accordance with the empirical regularity of time-varying betas we estimate and test for the Sharpe–Lintner CAPM by allowing for structural change(s) in betas. Empirical applications using BM- and size-sorted decile portfolios suggest the following interesting results. Firstly, there exists at least one break for all the portfolios under consideration. Secondly, the estimated break dates are quite similar for some of the portfolios, indicating the possible existence of a common break using multivariate time series. Finally, we find the CAPM can be consistent with the data in some regimes but may appear to be inconsistent with the data in some other regimes. This particularly appealing feature has been completely ruled out under the conventional single-equation framework.     

Testing PPP hypothesis under temporary structural breaks and asymmetric dynamic adjustments

ABSTRACT

We test the empirical validity of the PPP proposition under temporary structural breaks and dynamic nonlinear adjustments. Although several testing procedures have recently been proposed in the existing literature to investigate stochastic properties of the series under gradual breaks and nonlinear adjustments, none of these tests are compatible with the PPP proposition. Therefore, we propose new testing procedures that restrict the break to be temporary while simultaneously allowing for asymmetric dynamic nonlinear adjustment towards equilibrium. Using these newly proposed tests, we test stationarity of real exchange rate of 24 OECD countries vis-à-vis USA, and find support in favour of PPP proposition in majority of the countries.     

Structural breaks in consumption patterns: India 1952-1991

This study improves upon the econometric modelling for testing and incorporating structural breaks for a study on Indian consumption patterns covering a period of four decades and also explores the causes of such breaks. The tests for structural breaks in consumption patterns indicate multiple break points which are not uniform across the population groups and also across commodity groups. Further, the results indicate for the first time, that the breaks could often be induced by the changes in the data collection methodology of the survey and not due to changes in consumer behaviour alone. Apart from this, there is a shift in the consumption pattern during the mid-1980s in both the rural and the urban sectors. For the lowest expenditure class the shift is away from food items with the rural sector showing a change in the price response and the urban sector showing a change in the total expenditure coefficient. For the middle and the upper expenditure classes the shifts are not only from the food items towards non-food items but also from the 'food' group that includes items like cereals, milk and milk products towards the 'other food' group which includes items like vegetables and fruits. Its causes are found to be changes in preferences as well as the income effect.     

Power properties of the CUSUM and CUSUMSQ tests for parameter instability

This article investigates the power of CUSUM and CUSUMSQ tests for parameter stability and demonstrates that this depends on the nature of the structural change taking place. If the break is in the intercept of the regression equation then the CUSUM test has higher power. However, if the structural change involves a slope coefficient or the variance of the error term, then the CUSUMSQ test has higher power. This may help to explain why the two tests often produce contradictory findings.     

CHINA'S ECONOMIC GROWTH: WHAT DO WE LEARN FROM MULTIPLE‐BREAK UNIT ROOT TESTS?

This paper investigates China's economic growth by performing multiple‐break unit root tests on the data of national and sectoral output and output per worker to identify their steady‐state and transitional growth paths. The evidence generated suggests that the growth behaviour of the Chinese economy is consistent with endogenous growth theory. The results of multiple‐break unit root tests are then explained within the endogenous growth framework, using historical observations on how the evolution of economic institution/environment causes changes in some institutional parameters and hence in the steady‐state growth rate of GDP per worker.     

Central Bank's interventions and the Fisher hypothesis: a threshold cointegration investigation

The long-run relationship between nominal interest rates and inflation is examined, allowing for structural breaks and asymmetric mean reversion. From a Threshold AutoRegressive (TAR) test applied to the residuals of the cointegration relationship (while allowing for both a break in the mean of the long-run equation and a smooth regime-transition), there is strong evidence for non-linear mean reversion properties for the real interest rates of the US Treasury Bill market. This suggests asymmetric changes to inflation shocks in the Central Bank's reaction function. The existence of different regimes is consistent with some interpretations of the monetary policies run by the Fed, such as credibility and opportunism.     

Investigation of institutional changes in the UK housing market using structural break tests and time-varying parameter models

This paper investigates the effects of institutional changes within the UK housing market in recent decades using structural break tests and time-varying parameter models. This approach is motivated by models of institutional change drawn from the political science literature which focus on the existence of both fast-moving and slow-moving institutional changes and the interactions between them as drivers of the dynamics of asset prices. As a methodological contribution, we use several time-varying parameter models for the first time in investigations of institutional change. Our findings support the existence of both structural breaks and continuous variance in parameters. This contributes to our understanding of the housing market in two respects. Firstly, the dates of structural breaks appear to better match unexpected market shocks rather than remarkable political events, and this supports prior institutional theory. Secondly, assessment of the effect of slow-moving institutional changes shows that people’s biased expectations rather than the economic fundamentals have increasingly played an important role in driving housing prices in the short run although fundamentals continue to drive house prices to converge to their long-run equilibrium.     

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.     

Testing for weak-form efficiency of crude palm oil spot and future markets: new evidence from a GARCH unit root test with multiple structural breaks

There is a sizeable literature that tests for weak-form efficiency in commodity and energy spot and future prices. While many studies now allow for multiple structural breaks to address the criticism that conventional unit root tests have low power to reject the unit root null in the presence of structural change, the extant literature overlooks the fact that conventional unit root tests are biased in the presence of conditional heteroscedasticity. We apply a recently developed generalized autoregressive conditional heteroscedasticity (GARCH) unit root test with multiple structural breaks to crude palm oil spot and future prices and find much more evidence against weak-form efficiency than that found using tests that fail to allow for conditional heteroscedasticity. Our results point to the importance of allowing for heteroscedasticity when testing for efficiency in commodity and energy spot and future prices.     

Demand for money in the selected OECD countries: a time series panel data approach and structural breaks

Time series panel data estimation methods are used to estimate the cointegrating equations for the demand for money (M1) for a panel of 11 Organization for Economic Cooperation and Development (OECD) countries for which consistent quarterly data are available. The effects of financial reforms are analysed with structural break tests and estimates for alternative sub-samples. Our results for the post-reform sub-samples show that the income elasticity of the demand for money has decreased and response to interest rate changes has increased.     

The turning black tide: energy prices and the Canadian dollar

Abstract.  This paper revisits the relationship between energy prices and the Canadian dollar, using an equation first developed by Amano and van Norden (1995) . They found evidence of a negative relationship between these two variables, such that higher real energy prices led to a depreciation of the Canadian dollar. Based on structural break tests, we find a break point in the sign of this relationship, which changes from negative to positive in the early 1990s. The timing of the break is consistent with major changes in Canada's energy policies and in energy-related cross-border trade and investment.     

Tests for cointegration with two unknown regime shifts with an application to financial market integration

It is widely agreed in empirical studies that allowing for potential structural change in economic processes is an important issue. In existing literature, tests for cointegration between time series data allow for one regime shift. This paper extends three residual-based test statistics for cointegration to the cases that take into account two possible regime shifts. The timing of each shift is unknown a priori and it is determined endogenously. The distributions of the tests are non-standard. We generate new critical values via simulation methods. The size and power properties of these test statistics are evaluated through Monte Carlo simulations, which show the tests have small size distortions and very good power properties. The test methods introduced in this paper are applied to determine whether the financial markets in the US and the UK are integrated.      

Inflation and inflation uncertainty in the euro area

This article estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates their linkages in a VAR framework, also allowing for the possible impact of the policy regime change associated with the start of EMU in 1999. The main findings are as follows. Steady-state inflation and inflation uncertainty have declined steadily since the inception of EMU, whilst short-run uncertainty has stabilised. A sequential dummy procedure provides further evidence of a structural break coinciding with the introduction of the euro and resulting in lower long-run uncertainty. It also appears that the direction of causality has been reversed, and that in the euro period the Friedman-Ball link is empirically supported, consistently with the idea that the ECB can achieve lower inflation uncertainty by lowering the inflation rate.     

Instability tests in cointegration relationships. An application to the term structure of interest rates

This paper tries to review, from a practitioner's point of view, the recent strand of literature on cointegration tests allowing for structural changes or parameter instability. Thus, we apply several tests using as an example the expectations model of the term structure of interest rates. The results are consistent with the existence of cointegration between the long and the short run Spanish interest rates, with a vector (1,−1), as predicted by the theory. However, there is also evidence of structural instability, mainly at the beginning of 1994, that can be attributed to the financial changes that occurred in Spain as a result of its external commitments in the process of the European Monetary Union.     

中国通货膨胀动态路径的结构性转变及其启示

This article employs recently developed unknown structural break tests to investigate intrinsic structural instability in China inflation dynamics over 1981–2007. In order to capture accurately the statistical nature of potential structural beak, we use asymptotic p-value function under the non-standard distribution condition to compute the p-values for structural change tests in the presence of nuisance parameter. Empirical results suggest that China inflation dynamics witnessed a significant structural change at the end of 1994 and the instability appears to be originated from the dynamic parameters in the underlying model. The paper discusses important policy implications of the empirical findings through impulse response analyses.      

A further investigation of unemployment persistence in European transition economies

This paper analyses the dynamics of the unemployment rate in the eight countries from Central and Eastern Europe which joined the EU in 2004. Unit root tests allowing for nonlinearities and structural changes suggest that the unemployment rate is not stationary in most of the sample countries. Tests allowing for fractional integration, however, reveal that shocks are highly persistent, implying a slow rate of convergence to the natural rate of unemployment. The unemployment rate is least persistent in Hungary and Slovenia, more persistent in the Czech Republic, Slovakia and the Baltic States and extremely persistent in Poland. The degree of persistence appears to reflect the different levels of economic and institutional development in the countries and possibly also the role of the government.