Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.Recently, Perron has carried out tests of the unit-root hypothesis against the alternative hypothesis of trend stationarity with a break in the trend occurring at the Great Crash of 1929 or at the 1973 oil-price shock. His analysis covers the Nelson-Plosser macroeconomic data series as well as a postwar quarterly real gross national product (GNP) series. His tests reject the unit-root null hypothesis for most of the series. This article takes issue with the assumption used by Perron that the Great Crash and the oil-price shock can be treated as exogenous events. A variation of Perron's test is considered in which the breakpoint is estimated rather than fixed. We argue that this test is more appropriate than Perron's because it circumvents the problem of data-mining. The asymptotic distribution of the estimated breakpoint test statistic is determined. The data series considered by Perron are reanalyzed using this test statistic. The empirical results make use of the asymptotics developed for the test statistic as well as extensive finite-sample corrections obtained by simulation. The effect on the empirical results of fat-tailed and temporally dependent innovations is investigated. In brief, by treating the breakpoint as endogenous, we find that there is less evidence against the unit-root hypothesis than Perron finds for many of the data series but stronger evidence against it for several of the series, including the Nelson-Plosser industrial-production, nominal-GNP, and real-GNP series.the Nelson and Plosser series as an exogenous event. This jump, however, could be interpreted as a realization from the tail of the distribution of the underlying data-generating process. This interpretation views the Great Depression as a shock or a combination of shocks from the underlying errors.Similarly, an examination of the postwar quarterly GNP data shows a slowdown in GNP growth after the oil crisis in 1973. Analogous to his treatment of the Nelson and Plosser data, Perron's statistical model handles the slowdown in growth after the 1973 oil crisis as an event external to the domestic economy. Although it seems reasonable to regard the formation of the Organization of Petroleum Exporting Countries as an exogenous event, there are other big events such as the 1964 tax cut, the Vietnam War, and the financial deregulation in the 1980s that could also be viewed ex ante as possible exogenous structural breakpoints. Perron's preference for the 1973 oil-price crisis is undoubtedly influenced by his prior examination of the data.If one takes the view that these events are endogenous, then the correct unit-root testing procedure would have to account for the fact that the breakpoints in Perron's reg...

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