Bootstrapping Covariate Unit Root Tests: An Application to Inflation Rates

Abstract

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.