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Testing for Fractional Integration Versus Short Memory with Structural Breaks


  •  I would like to thank Anindya Banerjee, two anonymous referees and participants in seminars at LSE, CORE and UB for valuable comments and suggestions. Financial support from the Spanish Government CICYT project no SEJ2006-00369, the BGSE Research Network and the Generalitat de Catalunya is gratefully acknowledged. The usual disclaimer applies.


Although it is commonly accepted that most macroeconomic variables are non-stationary, it is often difficult to identify the source of the non-stationarity. Integrated processes and short-memory models with trending components, possibly affected by structural breaks, imply similar features in the data and, accordingly, are hard to distinguish. The goal of this article is to extend the classical testing framework of I(1) versus I(0) + trends and/or breaks by considering a more general class of models under the null hypothesis: fractionally integrated (FI) processes. The asymptotic properties of the proposed tests are derived and it is shown that they are very well-behaved in finite samples. An illustration using US inflation data is also provided.