The Uncertain Unit Root in the U.S. Poverty Rate
Empirical Economics, No. 22, 1997
Posted: 13 Apr 1998
The U.S. poverty rate, like many other aggregate economic time series, shows considerable persistence. It is logical to consider the model involving a unit root to provide a good description of the data generation process for the poverty rate. We pretest for unit roots in annual U.S. poverty rate data for the postwar period to examine its long-run features given the importance of a unit root for economic forecasting, macroeconometric cointegration modeling and Granger causality testing. Applying a number of available test procedures for pretesting on U.S. postwar poverty rate data, we find results that both support and contradict the claim that the poverty rate is a difference stationary process. The poverty rate data are found to be consistent with a unit root hypothesis when the alternative is I(0) with a linear trend. But the null hypothesis of a unit root is convincingly rejected when the alternative of I(0) with a broken trend line for a break at an endogenous point in time is considered. The estimate of the break in the trend corresponds to an information technology shock during the early 1970s.
JEL Classification: I32
Suggested Citation: Suggested Citation