Introduction to Time Series Econometrics with Eviews * UNIT ROOT Tests * [Mainly compiled from GP]

TS Data

Note: A random or stochastic process is a collection of random variables ordered in time.

RW

EXAMPLE from By M. İsmihan Towards a More Realistic Time Series Analysis of Unemployment Dynamics: the Dual Adjustment Approach* By M. İsmihan * Paper presented to the Fourth Nordic Post-Keynesian Conference-Economics at the Edge", 20th - 21st of April 2017, Aalborg University, Aalborg, Denmark.

Natural Rate vs. Hysteresis H. Hysteresis (in economics) generally ‘used to mean that, “after a shock, a variable does not return to its initial value, even when the shock has gone away”.’ BUT there are different definitions (Setterfield, 2010) Accr. to Blanchard and Summers (1988) : “What is required is a theory of unemployment in which unemployment, far from returning to a stable equilibrium -or "natural rate"- over time, is instead strongly dependent on history. We refer to such an equilibrium as a "fragile equilibrium," to highlight the sensitive dependence of unemployment on current and past events.” Milton Friedman “argued” that there is a unique natural rate of unemployment which is consistent with price stability. Natural Rate is determined as “the level ground out by the Walrasian system of general equilibrium equations... including market imperfections... the cost of gathering information about job vacancies and labor availabilities, the costs of mobility, and so on” (Friedman 1968) [ “Similar” arguments from Edmund Phelps] They earned Nobel Prize  “FIXED” or ahistorical EQUILIBRIUM HISTORY -DEPENDENT EQUILIBRIUM

Main focus shifted towards univariate TS properties of U [UNIVARIATE APPROACH] Most of the empirical studies in the existing literature have focused on the univariate time series properties of the unemployment rate. While the presence of unit roots in the unemployment rate series are considered to be evidence in favour of the hysteresis hypothesis, its rejection (i.e. stationarity of unemployment rate) is taken as a validation of the unique natural unemployment rate.

Univariate [Unit Root] Approach

Does unemployment rate have a unit root ? Ut = 1.60 + 0.97Ut-1 - 0.25Ut-2 Yes/No! 1%/5% Dickey Fuller

Answer is usually “yes” for many countries Does unemployment rate have a unit root ? Answer is usually “yes” for many countries

Univariate Approach (G6 – evidence)

Stochastic Vs Deterministic Trends

I (d)

DF Tests: Alt. Spec.

LGDP: DF Tests

LGDP: ADF Tests