Does the shape of economic recovery matter? An alternative unit root test with new smooth transition model

Abstract

The subject of economic recovery after the Coronavirus pandemic has received much attention in the media and by academics in recent years. Pandemic experience creates a new transition between the pre-pandemic era trend and the post-pandemic era trend related to the major economic indicators’ time series path. This paper offers a new smooth transition model and a unit root testing procedure to test null of non-stationary against the alternatives of stationary that allow for a pit shape smooth transition from the pre-pandemic trend to post-pandemic trend. The properties of the test statistics are investigated with several simulation studies. Also, the new model and unit root testing procedure are applied to industrial production index, consumer price index and the unemployment rates of Global 8 countries and results state the usefulness of these new tests.