Unit roots, non-linearities and structural breaks

Abstract

One of the most in ‡uential research …elds in econometrics over the past decades concerns unit root testing in economic time series. In macroeconomics much of the interest in the area originate from the fact that when unit roots are present, then shocks to the time series processes have a persistent e¤ect with resulting policy implications. From a statistical perspective on the other hand, the presence of unit roots has dramatic implications for econometric model building, estimation, and inference in order to avoid the so-called spurious regression problem. The present paper provides a selective review of contributions to the …eld of unit root testing over the past three decades. We discuss the nature of stochastic and deterministic trend processes, including break processes, that are likely to a¤ect unit root inference. A range of the most popular unit root tests are presented and their modi…cations to situations with breaks are discussed. We also review some results on unit root testing within the framework of non-linear processes.

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