Chapter 8 - Time Series Analysis (Stationarity, Cointegration, and Causality)

Abstract

Recently, the literature of environmental economics witnesses a plethora of research to test the environmental Kuznets curve (EKC) which is based on the time series analysis. The researchers postulate that the time series analysis is more relevant in the context environmental policy-making as compare to panel data or cross-sectional analysis. Because, the time series analysis focuses on the country specific analysis as contrary to generalized analysis such as the panel data. However, most of the researchers are not presenting the appropriate findings due to the lack of the understanding the applied concepts of time series. Specifically, the major chunk of the research ignores the issue of structural breaks and the related stream of time series econometrics, which may lead to wrong policy implications. Therefore, this chapter focuses on the issues of time series analysis which are related to test the EKC hypothesis. Specifically, we cover the issue of spurious regression, stationarity, unit root with and without structural breaks, cointegration with and without structural breaks. We argue that the researchers who are testing EKC hypothesis in the country cases should incorporate the newly developed methodologies with structural breaks such as Gregory and Hansen (1996) cointegration Test and Maki (2012) cointegration tests. We believe that these methodologies will make them to reestimate the EKC and recalculation of the turning points.