RESTRICTED STRUCTURAL CHANGE AND THE UNIT ROOT HYPOTHESIS

Abstract

In a classic paper, Nelson and Plosser could not reject the unit root hypothesis in favor of trend stationarity for 13 out of 14 long‐term annual macro series. Subsequent studies, allowing for one or two structural changes, have found more rejections with a broken trend stationary alternative. Since these changes are defined to be permanent, the rejections do not provide evidence of trend stationarity. We propose new tests for a unit root in the presence of restricted structural change. Allowing for two offsetting structural changes, we reject the unit root null in favor of restricted trend stationarity for 6 out of 13 series. (JEL C22, E32)