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 unemployment hysteresis in nonlinear heterogeneous panels: International evidence

Nonlinear behavior of unemployment is well documented in the literature, and thus linear unit root tests may not be appropriate in this case. This paper tests for hysteresis of unemployment for 29 OECD countries through the use of a new nonlinear panel unit root test developed by Ucar and Omay (2009). The test examines the joint null hypothesis of linearity and a unit root against the alternative hypothesis of nonlinear stationarity. Large power gains are achieved by both combining cross-sectional information with nonlinearities in the data. In addition, after the unit root null being rejected, we use a sequential panel selection method suggested by Chortareas and Kapetanios (2009) to classify the whole panel into a group of stationary countries and a group of non-stationary countries. The empirical findings show that the nonlinear panel test gives strong evidence in favor of the natural rate hypothesis of unemployment for 23 of 29 OECD countries, in contrast to those obtained by Chang's (2002) linear panel test that 17 countries display evidence of stationary unemployment.     

A REVISIT TO THE STATIONARITY OF OECD INFLATION: EVIDENCE FROM PANEL UNIT‐ROOT TESTS AND THE COVARIATE POINT OPTIMAL TEST*

This paper re‐examines the stationarity of inflation rates in 19 Organisation for Economic Cooperation and Development countries with the use of cross‐sectional information. We employ the panel unit‐root tests that allow for cross‐sectional dependency and the covariate point optimal test. These tests have high power in common due to the exploitation of cross‐sectional information, and they can assist mutually to draw a concrete conclusion on inflation dynamics for all series in the panel. Our empirical results show that allowing for cross‐sectional dependency rejects the null hypothesis that all series in the panel have a unit root, implying that there is at least one stationary series in the panel. With the help of the results of the covariate test, we can distinguish the panel into a group of stationary and a group of non‐stationary series. For robustness, the two groups of series are re‐confirmed by the panel tests. Our results reveal evidence of mean reversion in inflation for 15 of 19 countries, which is significantly stronger as compared to that obtained by the state‐of‐the‐art univariate unit‐root tests.     

Market Efficiency and Apparent Unit Roots: An Application to Exchange Rates

Prices in efficient markets are influenced by trading based on past patterns in the series. This induces parameter instability and near-random-walk behaviour in any time-series model of such data. Simulation results suggest that this parameter instability makes stationary series more likely to be erroneously classified as nonstationary, according to standard unit root or stationarity tests. It is shown that individual real exchange rate series appear individually non-stationary, especially for tests based on a null of stationarity, even though they appear stationary when treated as a panel.     

Performance of LM-type unit root tests with trend break: A bootstrap approach

Using the bootstrap approach, we study the finite-sample properties of the Lagrange Multiplier (LM) unit root tests when level shifts are allowed under the null hypothesis. Bootstrapped critical values support the invariance property of the LM tests. Applying two LM-type tests to the Nelson–Plosser data, we find less evidence against the unit root null than that given by Zivot and Andrews [Zivot, E. and Andrews, D.W.K. (1992), “Further Evidence of the Great Crash, the Oil Price Shock and the Unit Root Hypothesis,” Journal of Business and Economic Statistics 10, 251–270.] when level shifts are allowed under the null.     

Bootstrapping covariate stationarity tests for inflation rates

This paper investigates the stationarity properties of international inflation rates by bootstrapping two stationarity tests with covariates in Jansson (2004). When the asymptotic critical values are used, the two powerful tests are found to reject the null hypothesis less in the presence of a large negative moving-average (MA) error in inflation. To cope with this problem, a parametric bootstrap scheme is developed and then is investigated by a Monte Carlo study. The simulation results demonstrate that the bootstrap tests display a better control over the empirical rejection rates at finite samples. Furthermore, after applying these tests to the inflation in G-10 countries, we find that one of the two tests using bootstrap critical values yields inferences that differ from when using asymptotic ones, and as a whole, the bootstrap tests consistently provide strong evidence in support of mean reversion in inflation in most countries of the G-10.     

Are OECD consumption–income ratios stationary after all?

This paper investigates the stochastic properties of the consumption–income ratio for a sample of 23 OECD countries over the period 1960–2005. For that purpose, we employ a battery of recently developed panel unit root and stationarity tests. Our findings from panel unit root tests which do not control for structural breaks appear in line with those from previous studies since they are clearly supportive of the unit root hypothesis. In stark contrast stand the results obtained from the application of a panel stationarity test with multiple breaks, which support the existence of regime-wise stationarity in OECD consumption–income ratios once we control for cross-sectional dependence through bootstrap methods. These findings are reinforced by the median-unbiased estimates of half-lives obtained from impulse-response functions which are found to be finite for the 23 OECD countries.     

Testing for parameter restrictions in a stationary VAR model: A bootstrap alternative

This paper proposes the use of the bootstrap when the system Wald test is employed to test for linear restrictions in a stationary vector autoregressive (VAR) model. The bootstrap test is conducted using the estimated generalised least square estimator for VAR parameters, which considers contemporaneous correlations among the error terms. It is found that the bootstrap test shows little size distortion in small samples. In contrast, the asymptotic Wald test exhibits serious size distortion, severely over-rejecting the true null hypothesis in small samples. The bootstrap test also has desirable power properties, with its power particularly high when the model is near non-stationary and the error terms are highly correlated contemporaneously. As an application, the bootstrap Wald test is employed to test for the predictability of stock return from dividend yield using U.S. data.     

A reexamination of trends in primary commodity prices

This paper conducts a reexamination of the Prebisch-Singer hypothesis by employing the unit root test proposed by Lee and Strazicich (2003) and Lee and Strazicich (2004) that allow for up to two structural breaks. Given the higher power of these tests compared to the Zivot and Andrews (1992) and Lumsdaine and Papell (1997) tests, rejection of the null can be considered as genuine evidence of stationarity. The main findings of this paper are that eleven out of twenty-four commodity prices are found to be difference stationary implying that shocks to these commodities tend to be permanent in nature. The remaining thirteen prices are found to exhibit trend stationary behavior with either one or two structural breaks. Most of the commodities that do not exhibit difference stationary behavior seem to contain no significant trends. There are fewer cases, in relation to past studies, of commodities that display negative trends thereby weakening the case for the Prebisch-Singer hypothesis.     

Testing for PPP in developing countries using confirmatory analysis and different base countries: an application to Asian countries

Previous studies on PPP have tested either the null hypothesis of non-stationary or the null of a stationary real exchange rate and used the US as the base country and focused on industrialized countries. It has been argued that testing either null is insufficient to confirm the presence of PPP. It has also been noticed that the results are sensitive to the choices of the base country; for instance, the US versus Germany. In contrast to previous studies, this paper uses different unit root tests, confirmatory analysis, and different base countries to test PPP for a sample of developing countries in Asia during the current float. Overall, the results do not seem to be sensitive to the choice of the base country, and joint rejections are not present but joint non-rejections are far more common. Using Perron's test, which allows for a one-time break in the series, the results indicate evidence of stationarity for Indonesia, Korea, Malaysia and Thailand when the US is the base country. When Japan is the base country, evidence of stationarity is detected only for Indonesia.     

Are EU budget deficits stationary?

In this paper, we test for the stationarity of European Union budget deficits over the period 1971–2006, using a panel of thirteen member countries. Our testing strategy addresses two key concerns with regard to unit root panel data testing, namely (1) the presence of cross-sectional dependence among the countries in the panel and (2) the identification of potential structural breaks that might have occurred at different points in time. To address these concerns, we employ an AR-based bootstrap approach that allows us to test the null hypothesis of joint stationarity with endogenously determined structural breaks. In contrast to the existing literature, we find that the EU countries considered are characterised by fiscal stationarity over the full sample period irrespective of us allowing for structural breaks. This conclusion also holds when analysing sub-periods based on before and after the Maastricht treaty.     

Structural break,nonlinearity and asymmetry: a re-examination of PPP proposition

In this study, we examine the validity of the PPP proposition for 28 European countries. For this purpose, we propose a new unit root test procedure that allows for both gradual structural breaks and asymmetric nonlinear adjustment towards the equilibrium level. Small-sample properties of the new tests are examined through Monte-Carlo simulations. The simulation results suggest that the new tests have satisfactory size and power properties. We then apply these new tests along with other unit root tests to examine stationarity properties of real exchange rate series of the sample countries. Our tests reject the null of unit root in more cases when compared to alternative tests. Overall, we find that the PPP proposition holds in majority of the European countries examined in this article.     

Unemployment rate hysteresis and the great recession: exploring the metropolitan evidence

Standard unit-root tests of the hysteresis hypothesis specify a unit root under the null against the stationary alternative of the natural-rate hypothesis,     

BOOTSTRAPPING COVARIATE UNIT ROOT TESTS: AN APPLICATION TO INFLATION RATES

This paper proposes a bootstrap procedure for the covariate point optimal tests (CP_T) of Elliott and Jansson. Although the covariate tests enjoy large power gains over the traditional univariate unit root tests, our simulations show that they still suffer from severe size distortions at finite samples. Through simulations, we demonstrate the superiority of the bootstrap procedure in the sense that it can yield desirable size and power properties for the CP_T tests when the Akaike's information criterion is used. Moreover, we show the empirical relevance of the bootstrap tests by applying them to inflation in the G‐10 countries, and then obtain strong evidence against the unit root hypothesis for most countries at the 5% significance level.     

Purchasing Power Parity and the European single currency: Some new evidence

The effect of the single currency on the Purchasing Power Parity (PPP) hypothesis is examined in this study for the 15 EU countries, vis a vis the US dollar, before and after the advent of the euro. Standard as well as nonlinear unit root tests are employed on the time series dimension. Unit root tests reject PPP and the highest half-lives are observed after the introduction of the single currency. Panel unit root (Pesaran, 2007) and stationarity tests (Hadri and Kurozumi, 2008) that take into account cross-sectional dependence are also estimated. The results remain inconclusive as panel stationarity tests fail to support PPP whereas panel unit root tests fail to reject PPP for the whole sample and for the period before the introduction of the single currency.     

Nonlinearity and stationarity of inflation rates: evidence from the euro-zone countries

Earlier studies hardly reject the hypothesis of a unit root in inflation. Few studies have examined the possibility of nonlinearity in inflation and tested nonlinear stationarity of the inflation rates. This study thus intends to fill the gap. This study utilizes the tests for nonlinearity along with the unit root tests that allow for nonlinearity in the variables to examine the stationarity of inflation rates of 12 European countries that formed the Euro Zone (EZ) later in the sample period. The results suggest that the majority of these countries’ inflation rates can be characterized by mean reversion during the floating exchange rate period. Many of them appear to be nonlinear stationary. This finding is essential in conducting applied economic studies for these countries, when constructing models whose validity relies on whether or not inflation is stationary. The results of this study also imply that shocks to inflation have a transitory effect on inflation in the euro area. Therefore, it would be less costly in exercising the policies of disinflation for the monetary authorities of the euro area than for those of the countries with nonstationary inflation.     

Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution To the Purchasing Power Parity Puzzles

We fit nonlinearly mean-reverting models to real dollar exchange rates over the post-Bretton Woods period, consistent with a theoretical literature on transactions costs in international arbitrage. The half lives of real exchange rate shocks, calculated through Monte Carlo integration, imply faster adjustment speeds than hitherto recorded. Monte Carlo simulations reconcile our results with the large empirical literature on unit roots in real exchange rates by showing that when the real exchange rate is nonlinearly mean reverting, standard univariate unit root tests have low power, while multivariate tests have much higher power to reject a false null hypothesis.     

On the Stationarity of Current Account Deficits in the European Union

In this paper, we test for the stationarity of EU current account deficits. Our testing strategy addresses two key concerns with regard to unit‐root panel data testing, namely (i) the identification of which panel members are stationary, and (ii) the presence of cross‐sectional dependence. For this purpose, we employ an AR‐based bootstrap approach to the Hadri (2000 ) test. While there is only mixed evidence that current account stationarity applies when examining individual countries, this does not appear to be the case when considering panels comprising both EU and non‐EU members.     

Labour productivity trends in Australian manufacturing: some time series properties

Labour productivity plays a significant role in economic growth, labour demand and employment situation of a particular economy. In this light, the presence of a structural break in productivity, and its unit root property, has important consequences for the overall economy and in major sectors such as manufacturing. In this article, using some recently developed unit root tests, we examine: (i) the null hypothesis of a unit root in the log-level of labour productivity for 38 manufacturing subdivisions against the alternative of trend stationarity over a three-decade period; and (ii) the presence of a structural break in the series, and whether the break has had a permanent or a transitory effect on manufacturing labour productivity. Our main finding is that shocks to labour productivity have had a transitory effect, implying that policies are likely to have only short-term effects.     

Is real GDP stationary? Evidence from a panel unit root test with cross-sectional dependence and historical data

We use historical data that cover more than one century on real GDP for industrial countries and employ the Pesaran panel unit root test that allows for cross-sectional dependence to test for a unit root on real GDP. At first, we find strong evidence against the unit root null. Our results seem to be robust to the chosen group of countries and, in most cases, the sample period. However, the sequential panel selection method reveals that the rejection of the unit root null is due to the stationarity of real GDP in a few countries only. Real GDP is less stationary mostly in fixed exchange rate regimes like the Gold Standard and the Bretton Woods system.