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Testing for a Deterministic Trend when there is Evidence of Unit-Root

Manuel Gómez-Zaldívar and Daniel Ventosa-Santaulària

No EM200801, Department of Economics and Finance Working Papers from Universidad de Guanajuato, Department of Economics and Finance

Abstract: Whilst the existence of a unit root implies that current shocks have permanent effects, in the long run, the simultaneous presence of a deterministic trend obliterates that consequence. As such, the long-run level of macroeconomic series depends upon the existence of a deterministic trend. This paper proposes a formal statistical procedure to distinguish between the null hypothesis of unit root and that of unit root with drift. Our procedure is asymptotically robust with regard to autocorrelation and takes into account a potential single structural break. Empirical results show that most of the macroeconomic time series originally analyzed by Nelson and Plosser (1982) are characterized by their containing both a deterministic and a stochastic trend.

Keywords: Unit Root; Deterministic Trend; Trend Regression; R2 (search for similar items in EconPapers)
JEL-codes: C12 C13 C22 E30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-mac
Date: 2008-02, Revised 2010-06
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Related works:
Journal Article: Testing for a Deterministic Trend When There is Evidence of Unit Root (2011) Downloads
Working Paper: Testing for a Deterministic Trend when there is Evidence of Unit-Root (2010) Downloads
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