Endogenous Structural Breaks Research Articles

Long‐Term Forecasting of Global Carbon Dioxide Emissions: Reducing Uncertainties Using a Per Capita Approach

ABSTRACTGlobal CO2 emission forecasts span such a wide range as to yield little guidance for climate policy and analysis. But global per capita emissions appear to be better constrained than total emissions, which we argue has an economic justification. Trend stationarity of per capita emissions may provide a means of characterizing the relative likelihood of global forecasts. On data spanning 1950 to 2009 a unit root hypothesis allowing for endogenous structural breaks is rejected, but adding in the 2010 observation pushes the p‐value slightly over 0.1. Since structural breaks cannot be detected at the end of sample this may simply indicate a power problem. Using Monte Carlo simulations we conclude that the lower half of a well‐known suite of IPCC emission scenarios is more likely to occur than the upper half, and the top quartile is particularly difficult to justify. Copyright © 2013 John Wiley & Sons, Ltd.

Size and power properties of structural break unit root tests

In this article, we compare the small sample size and power properties of a newly developed endogenous structural break unit root test of Narayan and Popp (NP, 2010) with the existing two break unit root tests, namely the Lumsdaine and Papell (LP, 1997) and the Lee and Strazicich (LS, 2003) tests. In contrast to the widely used LP and LS tests, the NP test chooses the break date by maximizing the significance of the break dummy coefficient. Using Monte Carlo simulations, we show that the NP test has better size and high power, and identifies the structural breaks accurately. Power and size comparisons of the NP test with the LP and LS tests reveal that the NP test is significantly superior.

Testing the Prebisch-Singer Hypothesis Since 1650: Evidence from Panel Techniques that Allow for Multiple Breaks

In this paper, we re-examine two important aspects of the dynamics of relative primary commodity prices, namely the secular trend and the short run volatility. To do so, we employ 25 series, some of them starting as far back as 1650 and powerful panel data stationarity tests that allow for endogenous multiple structural breaks. Results show that all the series are stationary after allowing for endogeneous multiple breaks. Test results on the Prebisch-Singer hypothesis, which states that relative commodity prices follow a downward secular trend, are mixed but with a majority of series showing negative trends. We also make a rst attempt at identifying the potential drivers of the structural breaks. We end by investigating the dynamics of the volatility of the 25 relative primary commodity prices also allowing for endogenous multiple breaks. We describe the often time-varying volatility in commodity prices and show that it has increased in recent years.

Testing the Prebisch-Singer Hypothesis since 1650: Evidence from Panel Techniques that Allow for Multiple Breaks

In this paper, we re-examine two important aspects of the dynamics of relative primary commodity prices, namely the secular trend and the short run volatility. To do so, we employ 25 series, some of them starting as far back as 1650 and powerful panel data stationarity tests that allow for endogenous multiple structural breaks. Results show that all the series are stationary after allowing for endogeneous multiple breaks. Test results on the Prebisch-Singer hypothesis, which states that relative commodity prices follow a downward secular trend, are mixed but with a majority of series showing negative trends. We also make a first attempt at identifying the potential drivers of the structural breaks. We end by investigating the dynamics of the volatility of the 25 relative primary commodity prices also allowing for endogenous multiple breaks. We describe the often time-varying volatility in commodity prices and show that it has increased in recent years.

Are trade deficits sustainable? Evidence from the ASEAN‐five

Purpose – The purpose of this paper is to examine the long‐run sustainability of trade deficits for the ASEAN‐five economies, viz., Indonesia, Malaysia, the Philippines, Myanmar and Thailand, in the presence of structural breaks.Design/methodology/approach – It utilizes the Saikkonen and Lutkepohl cointegration procedure, allowing for structural breaks in the series. To determine endogenous structural breaks, the Lanne et al. unit root test is applied.Findings – The study confirms a long run relation between exports and imports for Indonesia, Myanmar and Thailand; and finds sustainable long‐run trade deficit only for Myanmar.Research limitations/implications – The results suggest that macroeconomic policies in Myanmar have been sustainable and effective in leading exports and imports to the long‐run steady state equilibrium. However, the paper did not find cointegration between exports and imports for Malaysia and the Philippines. This result suggests that macroeconomic policies have failed to establish; ...

Is there any Long-run Relationship between India’s Current and Capital Account Balance? A Time Series Analysis

The long-run relationship between current account balance (CAB) and capital account balance (KAB) and the repercussions of capital account convertibility (KAC) on the growth process of a country is a much-debated issue. In particular, in the aftermath of the Southeast Asian crisis, the limitation of the liberal capital regime for a developing country like India is often highlighted in the literature. However, the probable impact of introducing KAC on CAB in India is generally discussed theoretically. Though some empirical studies in India have recently focused on this research question, the current paper contributes to the literature first, by exploring the presence of any endogenous structural breaks in the individual series of CAB and KAB and then examining the nature of long-run relationship between them. Applying the ARDL method of co-integration, the empirical findings support the presence of a long term co-integrating relationship between capital and current account balance and reveals that a significant structural break is observed during 2002–03 for both the series.

Structural breaks and the equilibrium real effective exchange rate of China: A NATREX approach

This paper investigates the equilibrium real effective exchange rate for the Chinese RMB during the post-reform period, 1982–2010. We extend the NATREX model in several important perspectives and apply it for the first time to China. A wide range of economic fundamentals that are unique to the Chinese economy is introduced into the model. We construct a unique set of quarterly data and employ unit root and cointegration tests that can account for multiple endogenous structural breaks. In addition, to capture the evolution of China's foreign trade pattern, we employ time-varying (i.e. 3-year average) trade weights to construct the real effective exchange rate. We find two structural breaks in the cointegration relationship (in 1988 and 1992). Effective terms of trade, demographic factors, liquidity constraints and government investment are significant determinants of the equilibrium real effective exchange rate. The RMB was overvalued against a basket of 14 currencies until mid-1980s. During 1986–2010, it was undervalued in most years except after the Asian financial crisis in 1997. We have found persistent undervaluation from 2004 onwards. However, the misalignment rates are much lower than those reported by previous studies and the undervaluation rate actually declined sharply in 2008. The undervaluation rate rose modestly in 2009 and sharply in 2010, though it is still lower than what has been suggested by other studies.

The sustainability of trade deficits in the presence of endogenous structural breaks: Evidence from the Indian economy

This study examines the long-run relationship between exports and imports of the Indian economy during 1950–51 to 2008–09. Applying unit root test and cointegration technique that allows for endogenously determined structural break in the relationship, the results do not support the existence of any long-run equilibrium relationship between exports and imports and interest payments on net debt for India. Individually exports and imports have multiple breaks clustered roughly around three periods: early and mid seventies – the ‘comfort period’ in the country's balance of payments; 1986–87 that witnessed a sudden jump in exports trend after experiencing a flat trend in the first half of 1980s; and 1997–98 following the East Asian currency crisis. The findings imply that India's macroeconomic policies have not been very effective to ensure sustainability of trade deficit in the long-run and suggest that India is in violation of its international budget constraint.

Financial liberalization, structural breaks and stock market volatility: evidence from South Africa

This article examines the effect of financial liberalization on South African equity markets using Exponential Generalized Autoregressive Conditional Heteroscedastic (EGARCH) models. It utilises daily data and specifically, it analyses whether volatility persistence increased following financial liberalization. To achieve this objective, the study starts with endogenous structural break tests using Bai and Perron (2003) Ordinary Least Square (OLS)‐type test and the Cumulative Sum (CUSUM)‐type test of Inclan and Tiao (1994) and Sanso et al. (2004) respectively. These breaks are performed both in the stock returns and in the conditional variance over pre‐ and post‐liberalization periods. The significant break points identified through algorithm are incorporated into EGARCH models and to obtain the effect of financial liberalization, the study further adds liberalization dummy using official liberalization dates. The findings show that none of the estimated break dates coincide with the official liberalizati...

Breaks and trends in OECD countries' energy–GDP ratios

This paper uses the econometrics of endogenous structural breaks to examine changes in energy intensity trends for OECD countries over 1960–2009. Nearly all OECD countries currently have significant negatively trending energy–GDP ratios; but for several countries those negative trends are recent, and two countries have recent significant positive trends. For several countries, energy intensity had a significant positive trend followed by a break and then a significant negative trend. Those break-dates, however, appear to have little to do with level of development (GDP per capita). Alternatively, the volatile energy prices of the 1970s and early 1980s played a role in many of the countries that experienced inverted-V breaks. These findings have implications for future modeling and forecasting of energy consumption as well as for the role of energy price policy in developed and developing countries.

Cointegration and causal relationships among steel prices of Mainland China, Taiwan, and USA in the presence of multiple structural changes

Variation in the price of steel is an important factor to take into consideration when discussing cost control and management decisions in the construction industry. We employ various conventional and advanced econometrics methods to examine the interrelationships of steel prices in three related markets during the time period June 2002 to May 2010: Mainland China (CH), Taiwan (TW), and the United States (US). We adopt the Gregory and Hansen (GH) test and regime-switching (RS) model for cointegration, both of which accommodate endogenous structural break(s), to produce a more accurate analysis of a period in the presence of structural change(s). The empirical result of the RS cointegration test with respect to multiple structural breaks suggests a long-run equilibrium relationship among the three variables considered. This finding differs from the result of the GH test but confirms the result of the conventional Johansen test. Furthermore, the results of the Granger causality test indicate that both CH and US steel prices have great influence on the TW steel price; the Taiwanese steel market is closely linked with China and US steel markets in the long run.

Exploring stationarity and structural breaks in commodity prices by the panel data model

This article applies the panel unit root test of Carrion-i-Silvestre et al. (2005) to examine the relative prices of 24 nonfuel commodities over the period from 1900 to 2003. This test method allows for endogenous multiple structural breaks and the presence of cross-sectional dependence among commodities. The empirical results provided evidence of stationarity in relative prices of most commodities and supported the price theory in economics. In addition, the findings show that the locations of structural breaks coincided with the occurrences of some exogenous events over the past 100 years.

Structural Breaks and the Equilibrium Chinese Yuan/US Dollar Real Exchange Rate: A FEER Approach

AbstractThis paper examines the equilibrium Chinese yuan/US dollar (CNY/USD) real exchange rate within the framework of the fundamental equilibrium exchange rate (FEER) model. Endogenous structural breaks are allowed for in all cointegration relationships. Macroeconomic fundamentals that affect medium‐term savings and investment and hence, the sustainable current account, are also highlighted. A unique set of quarterly data for the post‐reform period (1982–2009) is constructed. This paper finds structural breaks in all trade and the sustainable current account equations. The misalignment rates show that the real exchange rate was overvalued in most years until 2003, followed by undervaluation during 2004–09. However, the average misalignment rates and revaluation required to correct this undervaluation are not as large as suggested by previous studies, with the undervaluation rate declining sharply in 2009. Further, misalignment rates are computed using a sustainable current account of 3%. The findings suggest such exogenous input leads to results biased towards larger undervaluation.

Structural change and foreign direct investment: globalization and regional economic integration

This paper investigates flows of inward and outward foreign direct investment (FDI) and FDI-to-GDP ratios in a sample of 62 countries over a 30 year time span. Using several endogenous structural break procedures (allowing for one and two break points), we find that: (1) the great majority of the series have structural breaks in the last 15 years, (2) post-break FDI and FDI/GDP ratios are substantially higher than the pre-break values, and (3) most breaks seem to be related to globalization, regional economic integration, economic growth, or political instability. Static and dynamic panel-data analyses accounting for and/or addressing endogeneity, simultaneity, nonstationarity, heterogeneity and cross-sectional dependence show that FDI is negatively related to exchange rate volatility and GDP per capita, but positively related to some regional integration agreements, trade openness, GDP, and GDP growth. Most notably, the European Union is the only regional economic integration unit found to consistently have significant and positive effects on FDI.

Energy consumption and economic growth revisited in African countries

The aim of this paper is to provide new empirical evidence on the relationship between energy consumption and economic growth for 21 African countries over the period from 1970 to 2006, using recently developed panel cointegration and causality tests. The countries are divided into two groups: net energy importers and net energy exporters. It is found that there exists a long-run equilibrium relationship between energy consumption, real GDP, prices, labor and capital for each group of countries as well as for the whole set of countries. This result is robust to possible cross-country dependence and still holds when allowing for multiple endogenous structural breaks, which can differ among countries. Furthermore, we find that decreasing energy consumption decreases growth and vice versa, and that increasing energy consumption increases growth, and vice versa, and that this applies for both energy exporters and importers. Finally, there is a marked difference in the cointegration relationship when country groups are considered.

A twelve-area model for the equilibrium Chinese Yuan/US dollar nominal exchange rate

This paper investigates the equilibrium CNY/USD nominal exchange rate during 1976–2008. We extend for the first time the five-area FABEER model to a twelve-area TABEER model for China. All parameters are estimated with allowance for endogenous structural breaks. Our investigation of the sustainable current account highlights macroeconomic factors that determine savings and investment in the medium-term. We find that all cointegration relationships are subject to structural breaks. The equilibrium nominal rate was overvalued in most years from early 1990s until 2003. It has been strongly undervalued during 2004–2008. We further compute misalignment rates using a sustainable current account of 3%. Our findings suggest such exogenous input leads to results biased towards larger undervaluation.

Factors, Characteristics and Endogenous Structural Breaks: Evidence from Japan

Using an updated Japanese sample covering the 1975-2006 period, we reexamine whether it is Fama and French's (1993) three-factor model or Daniel and Titman's (1997) characteristic model that better explains stock returns in the Japanese market. In contrast to Daniel, Titman, and Wei (2001), we find that the three-factor model works well for this updated sample. Further analysis identifies a structural break date in October 1997, which coincides with the publication date of Daniel and Titman's article. In particular, the characteristic model is supported before 1997, but not after; the Japanese evidence is similar to the U.S. evidence, as documented by Davis, Fama, and French (2000).

Test of Endogenous Structural Break for Different Crops: Case Study of West Bengal

The existing literature on West Bengal's agricultural growth based on traditional growth analysis is limited in explaining the nature of any series. The object of the present study is to test any structural break in the growth path of area, production and yield of different crops, using the endogenous structural break approach over the period 1980-1981 to 2002-2003. All the series, except pulses yield, have different stationary process implying that only changes associated with pulse yield are sustained in nature and no certain conclusion can be made for other cases. The inter-crop disparities with respect to the break point are conspicuous.

Testing for rational bubbles in the presence of structural breaks: Evidence from nonstationary panels

This paper presents new results on the rational bubbles hypothesis for a panel of 18 OECD countries using the model developed by Campbell (2000). We provide an analysis of international data that exploits increased power deriving from the panel unit root and cointegration methodology, together with the flexibility of allowing explicitly for multiple endogenous structural breaks in the individual series. Differently from the time series methodology, the panel data approach allows for a global analysis of the financial crashes that are related to rational bubbles. We find strong evidence in favor of bubbles phenomena.

Endogenous Structural Breaks and Real Exchange Rate Determination in Nigeria since Interbank Foreign Exchange Market (IFEM)

Starting from Obaseki (1998), several authors have developed different models of Naira equilibrium real exchange rate in a bid to better understand its behavior, albeit without accounting for the possibility and effects of structural breaks in their models. This is counterintuitive, especially in view of exchange rate policy changes in Nigeria over the years and the occurrence of global shocks resulting from the 2008/09 financial crisis. This paper reexamines the concept of naira real exchange rate determination in the spirit of Edwards (1989), while allowing for the effects of endogenously determined structural breaks in the cointegrating vector. The results were revealing. First, three endogenous break dates were identified over the estimation period of 2000-2011, which were 2002:Q3, 2003:Q2 and 2009:Q3. Second, we found faster speed of adjustment to long run equilibrium after accounting for the effects of the identified structural breaks. Third, the model without structural breaks underestimated the misalignment level by about 250 basis points on the average. Fourth, the nominal exchange rate (an indicator of exchange rate policy) was found to be very crucial in steering the RER towards its long run equilibrium path. Fifth, the level of naira misalignment was found to be about 0.001 per cent since the introduction of WDAS, much lower than the 0.89 and 0.21 recorded during IFEM and RDAS, respectively. The study therefore calls for the retention of the current exchange rate policy (WDAS) in the country as a way of ensuring that the Naira is kept within its path of long run equilibrium.