Statistical Adequacy and the Testing of Trend Versus Difference Stationarity

Abstract

The debate on whether macroeconomic series are trend or difference stationary, initiated by Nelson and Plosser [Nelson, C. R.; Plosser, C. I. (1982). Trends and random walks in macroeconomic time series: some evidence and implications. Journal of Monetary Economics10:139–162] remains unresolved. The main objective of the paper is to contribute toward a resolution of this issue by bringing into the discussion the problem of statistical adequacy. The paper revisits the empirical results of Nelson and Plosser [Nelson, C. R.; Plosser, C. I. (1982). Trends and random walks in macroeconomic time series: some evidence and implications. Journal of Monetary Economics10:139–162] and Perron [Perron, P. (1989). The great crash, the oil price shock, and the unit root hypothesis. Econometrica57:1361–1401] and shows that several of their estimated models are misspecified. Respecification with a view to ensuring statistical adequacy gives rise to heteroskedastic AR(k) models for some of the price series. Based on estimated models which are statistically adequate, the main conclusion of the paper is that the majority of the data series are trend stationary.