International evidence on shock persistence: structural change, nonlinearities and subsample robustness

Testing for unit roots and the related issue of measuring shock persistence has attracted considerable theoretical and applied econometric interest. T he issue of the size of the random walk component raised by Cochrane (Journ al of Political Economy, 96, 893-920, 1988) has been extended in the work o f other authors. Leung (Economics Letters, 40, 435-44, 1992), in particular , considers the effects of structural breaks on measures of persistence. In this paper we consider new results for the effects of structural change, n onlinearities and subsample robustness on spectral-based measures of persis tence illustrating the potential problems via an updated and extended versi on of the Cogley (Journal of Political Economy, 98, 501-18, 1990) data set. We find that significant structural breaks exist in the majority of the se ries investigated. Furthermore, measured persistence differs markedly acros s distinct periods with the assumption of common growth rates over very lon g periods leading on occasions to potentially erroneous conclusions on the degree of persistence. Nonlinearities measured by the significance of time squared (TSQ), seem important in many cases, particularly post-World War Tw o (WW2), potentially explaining the apparently high levels of post-WW2 pers istence. The paper concludes with a warning on the use of measures of persi stence when the data include structural change and/or nonlinearities, highl ighting the importance of the correct choice for breakpoints and second sub -sample start points.