A Monte Carlo Study of the Effects of Structural Breaks on Tests for Unit Roots

Hendry, David F.; Neale, Adrian J.

doi:10.1007/978-3-662-06824-3_8

Cited by 47 publications

(35 citation statements)

References 17 publications

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“…This assumption, however, may be violated in the presence of financial liberalization since this process is often regarded as generating structural change (Pradhan and Subramanian 2003). Hendry and Neale (1991) have shown that (i) regime shifts/structural change can mimic unit roots in stationary autoregressive time series, (ii) each shift is very hard to detect using conventional parameter constancy tests.…”

Section: Estimation Methodologymentioning

confidence: 99%

Financial Liberalization and Demand for Money: A Case of Pakistan

Khan¹,

Hye²

2013

jda

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Literature in economics has identified many channels through which the financial liberalization may affect demand for money. There are evidences of stability as well as instability of demand for money due to financial development for developing economies. The objective of the current study is to examine the effect of financial liberalization on demand for money in Pakistan, i.e. whether financial liberalization has affected the demand for money or not. The issue is important as stable demand for money function is a prerequisite for formulating and operating monetary policy. To achieve the objective JJ cointegration and auto regressive distributed lag (ARDL) to the cointegration is employed to estimate the long-run equilibrium relationship between broad money M 2 and composite financial liberalization index along with other determinants of demand for money like gross domestic product, real deposit rate and exchange rate. In order to assess the stability of the model, the parameter constancy tests, i.e. recursive residuals, CUSUM and CUSUMSQ tests have been applied. The empirical results indicated that for broad money, there exists long-run money demand function. The financial liberalization, gross domestic product and real deposit rate positively affect the demand for money in the long as well as short-run. JEL Classification: E41; E58; E52; O53; F31.

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Section: Estimation Methodologymentioning

confidence: 99%

Financial Liberalization and Demand for Money: A Case of Pakistan

Khan¹,

Hye²

2013

jda

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“…However it is well known that it can be dif¿cult to distinguish between deterministic shifts and unit roots in linear L +4, systems (see for example Perron, 1989, Rappoport and Reichlin, 1989, Hendry and Neale, 1991, and Campos, Ericsson and Hendry, 1996. Hence statistics for testing parameter constancy have important roles to play in evaluating the relative merits of alternative models for time series variables which might be subject to regime shifts, and in assessing whether conditions required for the valid application of procedures such as that of Johansen (1988) are satis¿ed.…”

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confidence: 99%

Small‐system modelling of real wages, inflation, unemployment and output per capita in Italy 1970–1994

Marcellino

Mizon

2001

J of Applied Econometrics

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The relationships between real wages, output per capita, inÀation and unemployment in Italy between 1970 and 1994, are modelled using a cointegrated vector autoregression. There is evidence of a change in the underlying equilibria and in the dynamic evolution of the variables, probably associated with the substantial changes in many sectors of the Italian economy after 1979. Alternative ways to model structural change in the Italian labour market are considered. In adopting a split sample approach the results favour an hysteresis interpretation of unemployment.JEL classi¿cation: C32, C50, E24, E37.

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“…Applying Autometrics with the theory variables forced to be retained, but selecting the dynamic reactions, has almost no impact on the match of the theory and evidence, the fit of the model, the coefficient magnitudes and their standard errors, or the lack of cointegration. Selection simply eliminates insignificant lagged variables: The finding of no cointegration with 'wrong signs', and an estimated lagged dependent variable coefficient close to unity, are consistent with unit roots 'capturing' breaks that are not dealt with directly (see inter alia Perron, 1989, Hendry and Neale, 1991, and Banerjee, Lumsdaine and Stock, 1992. There is a vast improvement in the coherence of the theory and evidence, with the anticipated signs on long-run elasticities, and cointegration is clearly indicated.…”

Section: Dynamic Modelsmentioning

confidence: 77%

“…Breaks matter greatly for food demand in a world subject to unanticipated shifts due to health scares, major wars, and the introduction of policy programs like food relief. Indeed not modelling breaks can result in estimated models exhibiting unit roots when none are there (see inter alia, Perron, 1989 andNeale, 1991). Outliers arise both from sudden behavioural shifts (scares over the safety of apples from alar; mercury in swordfish, salmonella in eggs, etc.…”

Section: Modelling With Data Revisions and Breaksmentioning

confidence: 99%

Econometric Modelling of Time Series with Outlying Observations

Hendry¹,

Mizon²

2011

Journal of Time Series Econometrics

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Economies are buffeted by natural shocks, wars, policy changes, and other unanticipated events. Observed data can be subject to substantial revisions. Consequently, a 'correct' theory can manifest serious mis-specification if just fitted to data ignoring its time-series characteristics. Modelling US expenditure on food, the simplest theory implementation fails to describe the evidence. Embedding that theory in a general framework with dynamics, outliers and structural breaks, using impulseindicator saturation, the selected model performs well, despite commencing with more variables than observations (see Doornik, 2009b), producing useful robust forecasts. Although this illustration involves a simple theory, the implications are generic and apply to sophisticated theories. JEL classifications: C51, C22.

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A Monte Carlo Study of the Effects of Structural Breaks on Tests for Unit Roots

Cited by 47 publications

References 17 publications

Financial Liberalization and Demand for Money: A Case of Pakistan

Financial Liberalization and Demand for Money: A Case of Pakistan

Small‐system modelling of real wages, inflation, unemployment and output per capita in Italy 1970–1994

Econometric Modelling of Time Series with Outlying Observations

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