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Unit Root Tests (unit + root_test)
Kinds of Unit Root Tests Selected AbstractsINFLATION TARGETING AND THE STATIONARITY OF INFLATION: NEW RESULTS FROM AN ESTAR UNIT ROOT TESTBULLETIN OF ECONOMIC RESEARCH, Issue 4 2006Andros Gregoriou E31; C22 ABSTRACT In this paper, we examine the time series properties of inflation in seven countries that have adopted inflation targeting. Unlike previous studies, we utilize a non-linear mean reverting adjustment mechanism for inflation and we discover that, although deviations of inflation from the target can exhibit a region of non-stationary behaviour, overall they are stationary indicating successful targeting implementation. [source] HYSTERESIS IN UNEMPLOYMENT REVISITED: EVIDENCE FROM PANEL LM UNIT ROOT TESTS WITH HETEROGENEOUS STRUCTURAL BREAKSBULLETIN OF ECONOMIC RESEARCH, Issue 4 2009Jun-De Lee C22; C23; J64 ABSTRACT This paper applies the panel LM unit root tests with heterogeneous structural breaks in level by Im,et al. (Oxford Bulletin of Economics and Statistics, 67 (2005), pp. 393,419) to re-examine the validity of hysteresis in the unemployment rates of 19 OECD countries. Our empirical findings are favourable to the stationarity of the unemployment rates, i.e., the unemployment hysteresis hypothesis is strongly rejected. Our results suggest that shocks to unemployment rates are temporary and soon converge when we control for breaks. A major policy implication of the study is that a fiscal or monetary stabilization policy would not have permanent effects on the unemployment rates of the 19 OECD countries. [source] Bayesian Unit Root Test in Nonnormal AR(1) ModelJOURNAL OF TIME SERIES ANALYSIS, Issue 3 2000Hikaru Hasegawa In this paper, we approximate the distribution of disturbances by the Edgeworth series distribution and propose a Bayesian analysis in a nonnormal AR(1) model. We derive the posterior distribution of the autocorrelation and the posterior odds ratio for unit roots hypothesis in the AR(1) model when the first four cumulants of the Edgeworth series distribution are finite and the higher order cumulants are negligible. We also apply the posterior analysis to eight real exchange rates and investigate whether these exchange rates behave like a random walk or not. [source] Seasonal Unit Root Tests Under Structural Breaks,JOURNAL OF TIME SERIES ANALYSIS, Issue 1 2004Uwe Hassler C12; C22 Abstract., In this paper, several seasonal unit root tests are analysed in the context of structural breaks at known time and a new break corrected test is suggested. We show that the widely used HEGY test, as well as an LM variant thereof, are asymptotically robust to seasonal mean shifts of finite magnitude. In finite samples, however, experiments reveal that such tests suffer from severe size distortions and power reductions when breaks are present. Hence, a new break corrected LM test is proposed to overcome this problem. Importantly, the correction for seasonal mean shifts bears no consequence on the limiting distributions, thereby maintaining the legitimacy of canonical critical values. Moreover, although this test assumes a breakpoint a priori, it is robust in terms of misspecification of the time of the break. This asymptotic property is well reproduced in finite samples. Based on a Monte-Carlo study, our new test is compared with other procedures suggested in the literature and shown to hold superior finite sample properties. [source] On the Robustness of Unit Root Tests in the Presence of Double Unit RootsJOURNAL OF TIME SERIES ANALYSIS, Issue 2 2002NIELS HALDRUP We examine some of the consequences on commonly used unit root tests when the underlying series is integrated of order two rather than of order one. It turns out that standard augmented Dickey,Fuller type of tests for a single unit root have excessive density in the explosive region of the distribution. The lower (stationary) tail, however, will be virtually unaffected in the presence of double unit roots. On the other hand, the Phillips,Perron class of semi-parametric tests is shown to diverge to plus infinity asymptotically and thus favouring the explosive alternative. Numerical simulations are used to demonstrate the analytical results and some of the implications in finite samples. [source] Nonlinear Alternatives to Unit Root Tests and Public Finances Sustainability: Some Evidence from Latin American and Caribbean Countries,OXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 5 2008Georgios Chortareas Abstract We analyse the sustainability of government debt for Latin American and Caribbean countries employing unit-root tests with nonlinear alternative hypotheses and examine the robustness of our results against those from unit-root tests with breaks and threshold nonlinearities. We show that, in general support for sustainability substantially improves when nonlinear mean reversion is taken into account. We also find that the results obtained from applying various tests with nonlinear alternatives, although broadly consistent, are not identical. This suggests that reliance on a single unit-root test for assessing fiscal policy sustainability may be misleading. [source] Break Point Estimation and Spurious Rejections With Endogenous Unit Root TestsOXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 5 2001Junsoo Lee This paper examines the accuracy of break point estimation using the endogenous break unit root tests of Zivot and Andrews (1992) and Perron (1997). We find that these tests tend to identify the break point incorrectly at one-period behind (TB -1) the true break point (TB), where bias in estimating the persistence parameter and spurious rejections are the greatest. In addition, this outcome occurs under the null and alternative hypotheses, and more so as the magnitude of the break increases. Consequences of utilizing these endogenous break tests are similar to (incorrectly) omitting the break term Bt in Perron's (1989) exogenous test. [source] Innovational Outlier Unit Root Tests With an Endogenously Determined Break in LevelOXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 5 2001David I. Harvey We show that a standard unit root test that permits an endogenously determined break in level can generate spurious rejections in practically interesting sample sizes when a large break occurs under the null hypothesis. This problem, which occurs for breaks of the innovational outlier type, can be corrected through a simple modification of the test procedure. [source] More powerful panel data unit root tests with an application to mean reversion in real exchange ratesJOURNAL OF APPLIED ECONOMETRICS, Issue 2 2004L. Vanessa Smith Unit root tests, seeking mean or trend reversion, are frequently applied to panel data. We show that more powerful variants of commonly applied tests are readily available. Moreover, power gains persist when the modifications are applied to bootstrap procedures that may be employed when cross-correlation of a rather general sort among individual panel members is suspected. Copyright © 2004 John Wiley & Sons, Ltd. [source] Comparison of unit root tests for time series with level shiftsJOURNAL OF TIME SERIES ANALYSIS, Issue 6 2002MARKKU LANNE Unit root tests are considered for time series which have a level shift at a known point in time. The shift can have a very general nonlinear form, and additional deterministic mean and trend terms are allowed for. Prior to the tests, the deterministic parts and other nuisance parameters of the data generation process are estimated in a first step. Then, the series are adjusted for these terms and unit root tests of the Dickey,Fuller type are applied to the adjusted series. The properties of previously suggested tests of this sort are analysed and modifications are proposed which take into account estimation errors in the nuisance parameters. An important result is that estimation under the null hypothesis is preferable to estimation under local alternatives. This contrasts with results obtained by other authors for time series without level shifts. [source] Is There a Natural Rate of Crime?AMERICAN JOURNAL OF ECONOMICS AND SOCIOLOGY, Issue 2 2010Paresh Kumar Narayan Studies in the economics of crime literature have reached mixed conclusions on the deterrence hypothesis. One explanation that has been offered for the failure to find evidence of a deterrent effect in the long run is the natural rate of crime. This article applies univariate unit root tests to crime series for the United Kingdom and United States and panel unit roots to crime rates for a panel of G7 countries to examine whether there is a natural rate of crime. Our main finding is that when we allow for two structural breaks in the univariate unit root test and a structural break in the panel data unit root test, there is strong evidence of a natural rate of crime. The policy implications of our findings is that governments should focus on altering the economic and social structural profile that determines crime in the long run rather than increasing expenditure on law enforcement that will at best reduce crime rates in the short run. [source] Innovational Outlier Unit Root Tests With an Endogenously Determined Break in LevelOXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 5 2001David I. Harvey We show that a standard unit root test that permits an endogenously determined break in level can generate spurious rejections in practically interesting sample sizes when a large break occurs under the null hypothesis. This problem, which occurs for breaks of the innovational outlier type, can be corrected through a simple modification of the test procedure. [source] ARE OUTPUT FLUCTUATIONS TRANSITORY?PACIFIC ECONOMIC REVIEW, Issue 4 2004NEW EVIDENCE FROM 24 CHINESE PROVINCES We examine this issue for 24 Chinese provinces using the recently developed Lagrange multiplier panel unit root test which allows for a structural break. Our main finding is that real gross domestic product (GDP) and real GDP per capita for Chinese provinces are stationary fluctuations around a deterministic trend. [source] Markov-Switching Mean Reversion in Short-Term Interest Rates: Evidence from East Asian Economies,THE ECONOMIC RECORD, Issue 263 2007CHEW LIAN CHUA This paper employs a Markov-switching approach to model the dynamics of East Asian short rates. Regime changes are incorporated in standard unit root test to reveal periodic changes in the stationarity property of interest rates. There is evidence that three of the five short rates follow a random walk process in tranquil and low rates episodes but mean-revert in periods when rates are high and volatile. Singapore short rates are characterised by a random walk process, whereas the Philippines rates behave as a mean-reverting process in both regimes. Factors such as exchange rates, monetary policy and interest rate differentials vis-à-vis US interest rates influence the likelihood of short rates being in a volatile state. The regime switching dynamics of interest rates carry important implications for policy-makers. [source] Price relations among hog, corn, and soybean meal futuresTHE JOURNAL OF FUTURES MARKETS, Issue 5 2005Qingfeng "Wilson" Liu This paper examines the relations among hog, corn, and soybean meal futures price series using the Perron (1997) unit root test and autoregressive multivariate cointegration models. Accounting for the significant seasonal factors and time trends, we find the three series are cointegrated with one single cointegrating vector, whose coefficients are comparable to the ratios used by the United States Department of Agriculture (USDA). Ex-post trading simulations that utilize the cointegration results generate significant profits, suggesting that market expectations may not fully incorporate the mean-reverting tendencies as indicated by the cointegration relations, and that inefficiency exists in these three commodity futures markets. Results from our ex-ante trading simulations that employ the USDA ratios also provide some evidence in this regard. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:491,514, 2005 [source] MEAN REVERSION OF THE FISCAL CONDUCT IN 24 DEVELOPING COUNTRIESTHE MANCHESTER SCHOOL, Issue 4 2010AHMAD ZUBAIDI BAHARUMSHAH In this paper, we examine the mean reverting behaviour of fiscal deficit by analysing the fiscal position of 24 developing countries. Using annual data over the period 1970,2003 and the series-specific panel unit root test developed by Breuer et al. (Oxford Bulletin of Economics and Statistics, Vol. 64 (2002), pp. 527,546), we found the budget process for most developing countries fails to satisfy the strong-form sustainability condition. Further investigation shows the budget process for a majority of the countries is on a sustainable path (weak form) when a one-time, structural break is allowed in the model. Therefore, our empirical results suggest that the budget process in most of the sample countries is in accordance with the intertemporal budget constraint. [source] The Stochastic Structure of the Time,Varying Beta: Evidence from UK CompaniesTHE MANCHESTER SCHOOL, Issue 6 2002Taufiq Choudhry The stochastic structure of time,varying betas from 15 companies in the UK is investigated. Time,varying betas are estimated by means of the bivariate MA,GARCH model. The stochastic structure is investigated by means of two fractional integration tests, the Geweke and Porter,Hudak and the Robinson tests, and a structural,break,oriented unit root test. Results show that time,varying betas are mean,reverting but only few have a long memory and thus are mean,reverting at a slow rate. This result is further backed by the structural break unit root test. These results contradict earlier studies, which fail to find a stationary beta. Stationary betas may imply that stock returns may be forecast in the long run. [source] ARE LABOUR FORCE PARTICIPATION RATES NON-STATIONARY?AUSTRALIAN ECONOMIC PAPERS, Issue 2 2008EVIDENCE FROM 130 YEARS FOR G7 COUNTRIES This paper applies a unit root test with a non-linear threshold to examine whether labour force participation rates are mean reverting for G7 countries using annual data over a 130 year period. We find some evidence of mean reversion for just over half the sample; however, this result is sensitive to regime shifts. We also examine whether the labour force participation rate is trend reverting through employing a lagrange multiplier (LM) unit root test with one and two structural breaks in the intercept and slope. The LM unit root test provides no additional evidence in support of stationarity. On the basis of the unit root tests for mean reversion we conclude that there is at best mixed evidence that long-term changes in unemployment rates translate into long-term changes in employment rates and that the unemployment rate is a useful indicator of joblessness. [source] THE AGRICULTURAL TERMS OF TRADE IN BANGLADESH: AN ECONOMETRIC ANALYSIS OF TRENDS AND MOVEMENTS, 1952,2006AUSTRALIAN ECONOMIC PAPERS, Issue 1 2008AKHAND AKHTAR HOSSAINArticle first published online: 21 APR 200 This paper investigates the trends and movements of agricultural prices, industrial prices and the agricultural terms of trade in Bangladesh with annual data for the period 1952,2006. The ADF and KPSS tests results suggest that both agricultural and industrial prices have a unit root while the agricultural terms of trade is trend-stationary. These results remain unchanged if allowance is made in the unit root test for the possibility of a structural break during 1971,1975 (when Bangladesh gained independence from Pakistan and experienced economic shocks) by applying the two-step procedure of Perron (1989). A simple Nerlovian agricultural price determination model is specified within the framework of aggregate demand and aggregate supply. The Johansen cointegration test results for the periods 1953,2006 and 1973,2006 suggest that there exists a cointegral relationship between agricultural prices, industrial prices, per-capita real income and the real exchange rate between the Bangladeshi taka and the US dollar under the restriction that per-capita real income and the real exchange rate are ,long-run forcing variables' in the sense of Pesaran and Shin (1995), and Pesaran, Shin and Smith (1996). The paper estimates a four-variable vector error-correction (VEC) model and conducts an impulse response analysis for the post-independence period, 1973,2006. [source] Pricing to Market Behavior by Canadian and U.S. Agri-food Exporters: Evidence from Wheat, Pulse and ApplesCANADIAN JOURNAL OF AGRICULTURAL ECONOMICS, Issue 2 2003Richard Carew A fixed-effects model to control for time variation in marginal costs is employed to pinpoint evidence of price discriminatory behavior of Canadian and U.S. exporters of agri-food products. We test for evidence of pricing to market behavior and whether price discrimination or commodity/country characteristics may provide a plausible explanation. A distinguishing feature of our approach is to examine the time-series properties of the data by the conventional augmented Dickey-Fuller and recently developed panel unit root test. The panel data set employed in this paper consists of annual exchange rates and export prices for three agri-food products (wheat, pulse and apples) exported by Canada and the U.S. in foreign markets during 1980,98. Our fixed-effects model suggests that U.S. exporters are sensitive to exchange rate changes, while Canadian exporters in most cases raised price markups in response to a depreciated currency in overseas markets. The results highlight the differences in pricing policy that both countries employ to merchandise agri-food products in export markets. Les auteurs ont recouru à un modèle à effets fixes pour contrôler la fluctuation des coûts marginaux dans le temps et montrer que les exportateurs canadiens et américains de produits agroalimentaires se comportent différemment dans l'établissement des prix. Ils ont tenté de vérifier si ce comportement varie avec les cours en vigueur sur le marché et essayé d'établir s'il s'explique par une discrimination au niveau des prix ou par les paramètres propres au produit ou au pays. Une particularité de cette approche est qu'elle tient compte des propriétés historiques des données en recourant à la version augmentée du test classique de Dickey Fuller et au tout nouveau test de racine unitaire reposant sur les panels. Le jeu de données recueillies par panel dont les auteurs se sont servis comprend le taux du change annuel et le prix d'exportation de trois produits agroalimentaires (blé, légumineuses à graine et pommes) que le Canada et les États-Unis ont écoulés sur les marchés étrangers entre 1980 et 1998. Le modèle à effets fixes laisse croire que les exportateurs américains sont sensibles au taux du change alors que, dans la plupart des cas, leurs homologues canadiens majorent les prix davantage consécutivement à une dépréciation des devises à l'étranger. Les résultats font ressortir les divergences entre les politiques de fixation des prix qu'emploient les deux pays pour écouler leurs produits agroalimentaires sur les marchés étrangers. [source] Tourism demand modelling: some issues regarding unit roots, co-integration and diagnostic testsINTERNATIONAL JOURNAL OF TOURISM RESEARCH, Issue 5 2003Paresh Kumar Narayan Abstract This paper investigates the all important issue of diagnostic tests, including unit roots and cointegration, in the tourism demand modelling literature. The origins of this study lie in the apparent lack in the tourism economics literature of detail concerning the diagnostic test aspect. Study of this deficiency has suggested that previous literature on tourism demand modelling may be divided into two categories: the pre-1995 and post-1995 studies. It was found that the pre-1995 and some post-1995 studies have ignored unit root tests and co-integration and, hence, are vulnerable to the so-called ,spurious regression' problem. In highlighting the key diagnostic tests reported by post-1995 studies, this paper contends that there is no need to report the autoregressive conditional heteroskedasticity (ARCH) test, which is applicable only to financial market analysis where the dependent variable is return on an asset. More generally, heteroskedasticity is not seen as a problem in time-series data. However, the reporting of a greater than necessary range of diagnostic tests,,,some of which do not have any theoretical justification with regard to tourism demand analysis,,,does not diminish the precision of the results or the model. This paper should appeal to scholars involved in tourism demand modelling. Copyright © 2003 John Wiley & Sons, Ltd. [source] More powerful panel data unit root tests with an application to mean reversion in real exchange ratesJOURNAL OF APPLIED ECONOMETRICS, Issue 2 2004L. Vanessa Smith Unit root tests, seeking mean or trend reversion, are frequently applied to panel data. We show that more powerful variants of commonly applied tests are readily available. Moreover, power gains persist when the modifications are applied to bootstrap procedures that may be employed when cross-correlation of a rather general sort among individual panel members is suspected. Copyright © 2004 John Wiley & Sons, Ltd. [source] Market integration and convergence to the law of one price in the North American onion marketsAGRIBUSINESS : AN INTERNATIONAL JOURNAL, Issue 2 2008Dwi Susanto The North American agricultural markets have become much more integrated; but the level of integration varies across sectors and over time. Differential tariff phasing-out periods and remaining trade disputes are two of many factors contributing to this. This article applies panel data unit root tests to study price convergence and market integration in the North American onion markets. Commodity and variety monthly base price data for the period of 1998 to 2006 are used. Empirical results decisively suggest the existence of price convergence across markets as well as onion varieties. A two-sample period analysis shows an increase in the speed of price convergence over time, suggesting deeper market integration as NAFTA was fully implemented. Further analysis based on a two-country-market basis found that U.S.,Canadian markets have experienced deeper market integration compared with U.S.,Mexican markets as well as Canadian,Mexican markets. [EconLit citations: F150, Q170]. © 2008 Wiley Periodicals, Inc. [source] Estimation and forecasting in first-order vector autoregressions with near to unit roots and conditional heteroscedasticityJOURNAL OF FORECASTING, Issue 7 2009Theologos Pantelidis Abstract This paper investigates the effects of imposing invalid cointegration restrictions or ignoring valid ones on the estimation, testing and forecasting properties of the bivariate, first-order, vector autoregressive (VAR(1)) model. We first consider nearly cointegrated VARs, that is, stable systems whose largest root, lmax, lies in the neighborhood of unity, while the other root, lmin, is safely smaller than unity. In this context, we define the ,forecast cost of type I' to be the deterioration in the forecasting accuracy of the VAR model due to the imposition of invalid cointegration restrictions. However, there are cases where misspecification arises for the opposite reasons, namely from ignoring cointegration when the true process is, in fact, cointegrated. Such cases can arise when lmax equals unity and lmin is less than but near to unity. The effects of this type of misspecification on forecasting will be referred to as ,forecast cost of type II'. By means of Monte Carlo simulations, we measure both types of forecast cost in actual situations, where the researcher is led (or misled) by the usual unit root tests in choosing the unit root structure of the system. We consider VAR(1) processes driven by i.i.d. Gaussian or GARCH innovations. To distinguish between the effects of nonlinear dependence and those of leptokurtosis, we also consider processes driven by i.i.d. t(2) innovations. The simulation results reveal that the forecast cost of imposing invalid cointegration restrictions is substantial, especially for small samples. On the other hand, the forecast cost of ignoring valid cointegration restrictions is small but not negligible. In all the cases considered, both types of forecast cost increase with the intensity of GARCH effects. Copyright © 2009 John Wiley & Sons, Ltd. [source] Seasonal Unit Root Tests Under Structural Breaks,JOURNAL OF TIME SERIES ANALYSIS, Issue 1 2004Uwe Hassler C12; C22 Abstract., In this paper, several seasonal unit root tests are analysed in the context of structural breaks at known time and a new break corrected test is suggested. We show that the widely used HEGY test, as well as an LM variant thereof, are asymptotically robust to seasonal mean shifts of finite magnitude. In finite samples, however, experiments reveal that such tests suffer from severe size distortions and power reductions when breaks are present. Hence, a new break corrected LM test is proposed to overcome this problem. Importantly, the correction for seasonal mean shifts bears no consequence on the limiting distributions, thereby maintaining the legitimacy of canonical critical values. Moreover, although this test assumes a breakpoint a priori, it is robust in terms of misspecification of the time of the break. This asymptotic property is well reproduced in finite samples. Based on a Monte-Carlo study, our new test is compared with other procedures suggested in the literature and shown to hold superior finite sample properties. [source] Comparison of unit root tests for time series with level shiftsJOURNAL OF TIME SERIES ANALYSIS, Issue 6 2002MARKKU LANNE Unit root tests are considered for time series which have a level shift at a known point in time. The shift can have a very general nonlinear form, and additional deterministic mean and trend terms are allowed for. Prior to the tests, the deterministic parts and other nuisance parameters of the data generation process are estimated in a first step. Then, the series are adjusted for these terms and unit root tests of the Dickey,Fuller type are applied to the adjusted series. The properties of previously suggested tests of this sort are analysed and modifications are proposed which take into account estimation errors in the nuisance parameters. An important result is that estimation under the null hypothesis is preferable to estimation under local alternatives. This contrasts with results obtained by other authors for time series without level shifts. [source] On the Robustness of Unit Root Tests in the Presence of Double Unit RootsJOURNAL OF TIME SERIES ANALYSIS, Issue 2 2002NIELS HALDRUP We examine some of the consequences on commonly used unit root tests when the underlying series is integrated of order two rather than of order one. It turns out that standard augmented Dickey,Fuller type of tests for a single unit root have excessive density in the explosive region of the distribution. The lower (stationary) tail, however, will be virtually unaffected in the presence of double unit roots. On the other hand, the Phillips,Perron class of semi-parametric tests is shown to diverge to plus infinity asymptotically and thus favouring the explosive alternative. Numerical simulations are used to demonstrate the analytical results and some of the implications in finite samples. [source] The Effect of the Size of the Military on Stock Market Performance in the United States and the UKKYKLOS INTERNATIONAL REVIEW OF SOCIAL SCIENCES, Issue 1 2008William R. DiPietro SUMMARY This paper uses regression analysis to investigate the relationship between military expenditure and stock market performance for the United States and the United Kingdom. Specifically, the study applies the Bierens-Guo unit root procedures to ascertain the time series properties of the variables in the study. The standard OLS technique is employed to determine the influence of military expenditure on stock markets for the period 1914 through 2001. The results from the unit root tests indicate that the military expenditure, military personnel, stock market, and energy consumption series are level stationary. The results from the OLS equations suggest that military expenditure has significantly positive effect on stock market performance for the United States and the United Kingdom. The implication of this finding is that high-income class and people in power are less likely to oppose increases in military spending even though such expenditures are not in the best interest of the society. [source] IS THERE UNIT ROOT IN THE NITROGEN OXIDES EMISSIONS: A MONTE CARLO INVESTIGATION?NATURAL RESOURCE MODELING, Issue 1 2010NINA S. JONES Abstract Use of the time-series econometric techniques to investigate issues about environmental regulation requires knowing whether air pollution emissions are trend stationary or difference stationary. It has been shown that results regarding trend stationarity of the pollution data are sensitive to the methods used. I conduct a Monte Carlo experiment to study the size and power of two unit root tests that allow for a structural change in the trend at a known time using the data-generating process calibrated to the actual pollution series. I find that finite sample properties of the Perron test are better than the Park and Sung Phillips-Perron (PP) type test. Severe size distortions in the Park and Sung PP type test can explain the rejection of a unit root in air pollution emissions reported in some environmental regulation analyses. [source] Is There a Natural Rate of Crime?AMERICAN JOURNAL OF ECONOMICS AND SOCIOLOGY, Issue 2 2010Paresh Kumar Narayan Studies in the economics of crime literature have reached mixed conclusions on the deterrence hypothesis. One explanation that has been offered for the failure to find evidence of a deterrent effect in the long run is the natural rate of crime. This article applies univariate unit root tests to crime series for the United Kingdom and United States and panel unit roots to crime rates for a panel of G7 countries to examine whether there is a natural rate of crime. Our main finding is that when we allow for two structural breaks in the univariate unit root test and a structural break in the panel data unit root test, there is strong evidence of a natural rate of crime. The policy implications of our findings is that governments should focus on altering the economic and social structural profile that determines crime in the long run rather than increasing expenditure on law enforcement that will at best reduce crime rates in the short run. [source] | |||||||||||||||||||||||||||||||