This paper develops an asymptotic theory of inferences for an unrestricted
two-regime threshold autoregressive (TAR) model with an autoregressive unit
root. We find that the asymptotic null distribution of Wald tests for a th
reshold arc nonstandard and different from the stationary case, and suggest
basing inference on a bootstrap approximation. We also study the asymptoti
c null distributions of tests for an autoregressive unit root, and find tha
t they are nonstandard and dependent on the presence of a threshold effect.
We propose both asymptotic and bootstrap-based tests. These tests and dist
ribution theory allow for the joint consideration of nonlinearity (threshol
ds) and nonstationary (unit roots). Our limit theory is based on a new set
of tools that combine unit root asymptotics with empirical process methods.
We work with a particular two-parameter empirical process that converges w
eakly to a two-parameter Brownian motion.
Our limit distributions involve stochastic integrals with respect to this t
wo-parameter process. This theory is entirely new and may find applications
in other contexts.
We illustrate the methods with an application to the U.S. monthly unemploym
ent rate. We find strong evidence of a threshold effect. The point estimate
s suggest that the threshold effect is in the short-run dynamics, rather th
an in the dominate root. While the conventional ADF test for a unit root is
insignificant, our TAR unit root tests are arguably significant. The evide
nce is quite strong that the unemployment rate is not a unit root process,
and there is considerable evidence that the series is a stationary TAR proc
ess.