Unit Roots in the Presence of Abrupt Governmental Interventions with an Application to Brazilian Data

Posted: 30 Jan 1997

See all articles by Pierre Perron

Pierre Perron

Boston University - Department of Economics

Regina Celia Cati

Boston University - Department of Economics

Marcio G. P. Garcia

Pontifical Catholic University - Department of Economics

Date Written: January 1996

Abstract

This paper considers econometric issues related to time series data that have been subject to abrupt governmental interventions. The motivating example for this study is the Brazilian monthly inflation and interest rate series (1974:1- 1994:6) which we use throughout for illustration. These series have been heavily influenced by the effect of so-called shock plans implemented by various governments starting in the mid 80's. The plans act as "inliers" in the sense that the series are temporarily brought down to low levels before returning to their previous trend path. We analyze the effects on standard unit root tests and measures of persistence caused by the presence of these "inliers". We show a substantial bias in favor of concluding that the series are stationary and that shocks have temporary effects. We then construct appropriately corrected statistics which take into account the presence of the plans. These show, unlike the standard tests, that the stochastic behavior of inflation and interest rate was indeed explosive over this period. Simulation results are presented to support the adequacy of our corrected statistics.

JEL Classification: C22

Suggested Citation

Perron, Pierre and Cati, Regina Celia and Garcia, Marcio G. P., Unit Roots in the Presence of Abrupt Governmental Interventions with an Application to Brazilian Data (January 1996). Available at SSRN: https://ssrn.com/abstract=9512

Pierre Perron (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-3026 (Phone)

Regina Celia Cati

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

Marcio G. P. Garcia

Pontifical Catholic University - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil
(5521) 274 2797 or 294 5490 (Phone)
(5521) 294 2095 (Fax)

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