Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots

69 Pages Posted: 25 Jun 2004 Last revised: 12 Apr 2023

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Pierre Perron

Boston University - Department of Economics

Date Written: April 1991

Abstract

This paper is an introduction to unit root econometrics as applied in macroeconomics. The paper first discusses univariate time series analysis, emphasizing the following topics: alternative representations of unit root processes, unit root testing procedures, the power of unit root tests, and the interpretation of unit root econometrics in finite samples. A second part of the paper tackles similar issues in a multivariate context where cointegration is now the central concept. The paper reviews representation, testing, and estimation of multivariate time series models with some unit roots. Two important themes of this paper are first, the importance of correctly specifying deterministic components of the series; and second, the usefulness of unit root tests not as methods to uncover some -true relation" but as practical devices that can be used to impose reasonable restrictions on the data and to suggest what asymptotic distribution theory gives the best approximation to the finite-sample distribution of coefficient estimates and test statistics.

Suggested Citation

Campbell, John Y. and Perron, Pierre, Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots (April 1991). NBER Working Paper No. t0100, Available at SSRN: https://ssrn.com/abstract=225157

John Y. Campbell (Contact Author)

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Pierre Perron

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