Abstract
THE issue of whether macroeconomic time series should be modelled as difference stationary or as trend stationary processes has received considerable attention since the study by Nelson and Plosser (1982) found evidence for difference stationarity in US macroeconomic variables. Tests using the Dickey-Fuller methodology (1979), or that suggested in Campbell and Mankiw (1989), have on the whole supported the conclusion that most macroeconomic time series have a unit root. But in a recent series of papers Perron (1989,1990) has challenged this consensus, arguing that most US macroeconomic time series are best modelled as stationary fluctuations around a deterministic trend function once one allows for a shift in the intercept and/or slope of the trend function. In this paper I carry out a number of tests of the unit root hypothesis on annual UK macroeconomic time series. The variables I consider are real income, per capita real income, nominal income, the price level, the quantity of money, and the nominal and real interest rates. I find that on the basis of Dickey-Fuller tests I cannot reject a unit root in any of the series except the real interest rate. However, on the basis of the tests suggested by Perron (1989, 1990) I find that I can decisively reject the unit root hypothesis in the case of real output, per capita real output, and the nominal interest rate, but not in the case of nominal income, prices, or the quantity of money. From one perspective these findings, like those of Perron, can be taken as an illustration of the sensitivity of conventional unit root tests to the possibility of a single break in a trend stationary process. From another they can be seen as an illustration of the classical dichotomy: the variables denominated in currency units-in this case ?s appear to behave in accordance with a process different in nature from that which drives the other mainly real variables. The paper consists of one section in which I report the results, and a brief summary.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
