The order of integration for quarterly macroeconomic time series: A simple testing strategy

An empirical example and a simulation study show that much more attention should be devoted to the practical issue of selecting the maximum admissible order of integration for quarterly macroeconomic time series. In fact, it is shown that when that order is too high, one may get (spurious) evidence for an excessive number of unit roots, resulting in an overdifferenced series. Besides introducing a simple and intuitive definition for the order of integration of quarterly time series, this paper also presents a simple testing strategy to determine that order for the case of macroeconomic data.Helpful comments and suggestions from João Santos Silva and Paulo Rodrigues are gratefully acknowledged. I am also grateful to two anonymous referees, whose comments and suggestions helped improving this paper. Obviously, the usual disclaimer applies. This work has also benefited from financial support from Fundação para a Ciência e Tecnologia (FCT), through Programa POCTI (ECO/33778/2000). A previous version of this paper was presented at the Royal Economic Society Conference, March 2002, Warwick.