Working Paper: NBER ID: w11487
Authors: Junsoo Lee; John A. List; Mark Strazicich
Abstract: In this paper we examine temporal properties of eleven natural resource real price series from 1870-1990 by employing a Lagrangian Multiplier unit root test that allows for two endogenously determined structural breaks with and without a quadratic trend. Contrary to previous research, we find evidence against the unit root hypothesis for all price series. Our findings support characterizing natural resource prices as stationary around deterministic trends with structural breaks. This result is important in both a positive and normative sense. For example, without an appropriate understanding of the dynamics of a time series, empirical verification of theories, forecasting, and proper inference are potentially fruitless. More generally, we show that both pre-testing for unit roots with breaks and allowing for breaks in the forecast model can improve forecast accuracy.
Keywords: Natural resource prices; Unit root tests; Structural breaks; Forecasting accuracy
JEL Codes: Q31; C12; C53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Structural breaks (C22) | Time series behavior of natural resource prices (Q31) |
| Pretesting for unit roots with structural changes (C22) | Forecasting accuracy (C53) |
| ARMA models with breaks (C22) | Forecasting accuracy (C53) |
| Natural resource prices are stationary around deterministic trends (Q31) | Unit root hypothesis (C22) |