Are business cycles stationary fluctuations around a deterministic trend? Empirical evidence from 79 developing countries

Abstract

There is a large literature that tests the univariate time series properties of the real output series following the seminal work of Nelson and Plosser (1982). Whether or not real output is characterized by a unit root process has important implications. A unit root in real output, for instance, is inconsistent with the notion that business cycles are stationary fluctuations around a deterministic trend. In this paper, we investigate the univariate time series properties of real output for 79 developing countries using the conventional augmented Dickey and Fuller (1979) unit root test, the Zivot and Andrews’ (1992) one structural break unit root test, and the Lumsdaine and Papell (1997) two structural breaks unit root test. Our main finding is that, for 40 countries, real output is stationary around a trend. This indicates that business cycles are stationary fluctuations around a deterministic trend for only 51% of the developing countries in our sample.

Keywords:

• structural break unit root test
• business cycles
• developing countries

JEL Classifications:

• C22
• O1
• O4

Acknowledgements

Helpful comments and suggestions on earlier versions of this paper from two anonymous referees of this journal, the Editor, Tom Nguyen, Russell Smyth and Mita Bhattacharya are acknowledged.