Publication: Wald Tests of I(1) against I(d) alternatives: some new properties and an extension to processes with trending components
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2008
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The Berkeley Electronic Press
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Abstract
This paper analyses the behaviour of a Wald-type test, i.e., the (E¢ cient) Fractional
Dickey-Fuller (EFDF) test of I(1) against I(d); d < 1; relative to LM tests. Further, it extends
the implementation of the EFDF test to the presence of deterministic trending components in
the DGP. Tests of these hypotheses are important in many macroeconomic applications where
it is crucial to distinguish between permanent and transitory shocks because shocks die out in
I(d) processes with d < 1. We show how simple is the implementation of the EFDF in these
situations and argue that, under xed alternatives, it is preferred to the LM test in Bahadur´ s
sense. Finally, an empirical application is provided where the EFDF approach allowing for
deterministic components is used to test for long-memory in the GDP p.c. of several OECD
countries, an issue that has important consequences to discriminate between alternative growth
theories.
Description
Forthcoming 2008
Keywords
Deterministic components, Fractional processes, Power, Unit roots
Bibliographic citation
Studies in Nonlinear Dynamics & Econometrics, 2008, v. 12, n. 4