Structural breaks and unit root: evidence from Pakistani macroeconomic time series

Waheed, Muhammad and Alam, Tasneem and Ghauri, Saghir Pervaiz (2006): Structural breaks and unit root: evidence from Pakistani macroeconomic time series.

Abstract

The purpose of this paper is to examine the unit root properties of eleven Pakistani macroeconomic series using annual data. Along with traditional unit root tests, we use the procedure developed by Zivot and Andrews to test the null of unit root against the break-stationary alternative. Conventional unit root tests indicate that all variable are non-stationary at the levels. Results from Zivot and Andrews test suggest that we can reject the null of unit root for CPI and WPI at 5 percent significance level while we fail to reject the unit root hypothesis for the remaining 9 series. At the same time, the Zivot and Andrews test identifies endogenously the point of the single most significant structural break in every time series examined. The results show that ten of the eleven series studied bear witness to the presence of a structural break during the period 1972 to 1976.

• Item Type: MPRA Paper
• Institution: State Bank of Pakistan
• Language: English
• Keywords: Structural break; unit root; pakistan
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes

References

Ball, L. (1993), The dynamics of high inflation, NBER working paper N0. 4578. Banerjee, A., R. Lumsdaine and J. Stock, (1992), Recursive and sequential tests of the unit root and trend break hypothesis: theory and international evidence, Journal of Business and Economic Statistics, 10, 271-287. Ben-David, D. and D. Papell, (1997), Slowdowns and meltdowns: post war growth evidence from 74 countries, Review of Economics and Statistics, 28(2), 561-571. Chaudhuri, K. and Y. Wu, (2003) Random walk versus breaking trend in stock prices: evidence from emerging markets, Journal of Banking and Finance, 27, 575-592. Christiano, L. (1992), Searching for a break in GNP, Journal of Business and Economic Statistics, 10, 237-250. Christiano, L. and M. Eichenbaum, (1990). Unit Roots in Real GDP: Do we know, and do we care? Carnegie Rochester Conference Series on Public Policy, 32: 7-62. Dicky, D. and W.A. Fuller, (1979), Distribution of the estimates for autoregressive time series with a unit root, Journal of the American Statistical Association, 74, 427-431. Elliott, G., T.J. Rothenberg, and J.H. Stock (1996). Efficient Tests for an Autoregressive Unit Root, Econometrica 64, 813-836. Gilberto L., (2005). Unit roots in macroeconomic time series: theory, implications, and evidence, Nova Economia, Economics Department, Universidade Federal de Minas Gerais (Brazil), 15(3), 145-176 Hall, A.D., (1994), Testing for a unit root in time series with pretest data based model selection, Journal of Business and Economic Statistics, 12, 461-470 Janjua, M.A., (2003), History of the State Bank of Pakistan (1977-88), State bank of Pakistan. Lee, J., and M.C. Strazicich, (2003), Minimum lagrange multiplier unit root test with two structural breaks, The Review of Economics and Statistics, 85(4), 1082–1089 Lumsdaine, R. and D. Papell, (1997), Multiple trend breaks and the unit root hypothesis, Review of Economics and Statistics, 79, 212-218. Maddala, G.S. and In-Moo. Kim, (1998), Unit roots, Cointegration and Structural Change, Cambridge University Press. Narayan, P.K. and R. Smyth, (2004), Structural breaks and unit root in Australian macroeconomic time series, Monash University, Discussion Paper 18/04. Nelson, C.R. and C.I. Plosser, (1982), Trend and random walks in macroeconomic time series, Journal of Monetary Economics, 10, 139-162. Ng, S. and P. Perron, (1995), Unit root tests in ARMA models with data dependent methods for the selection of the truncation lag, Journal of American Statistical Association, 90, 268-281 Perron, P. (1989), The great crash, the oil price shock and the unit root hypothesis, Econometrica, 57, 1361-1401. Perron, P. (1997), Further evidence on breaking trend functions in macroeconomic variables, Journal of Econometrics, 80, 355-385. Phillips, P.C.B. and P. Perron, (1988), Testing for a unit root in time series regression, Biometrika, 75(2), 335–346. Piehl, A.M., S.J. Cooper, A.A. Braga, and D.M. Kennedy, (1999), Testing for structural breaks in the evaluation of programs, NBER working paper 7226. Sen, A., (2003), On unit root tests when the alternative is a trend break stationary process, Journal of Business and Economic Statistics, 21, 174-184. Zivot, E. and D. Andrews, (1992), Further evidence of great crash, the oil price shock and unit root hypothesis, Journal of Business and Economic Statistics, 10, 251-270.