New evidence on breaking trend functions in real GDPs from Great China Economic Area

ABSTRACT

This article explores the difference in the time series property of economic output for the Great China Economic Area (GCEA) (Mainland China, Hong Kong and Taiwan). Using the powerful Kim and Perron (2009) unit root test and real GDPs over the period 1992–2014 as the study sample, results indicate the presence of a break for all economies that corresponds to the Asian financial crisis. Additionally, allowing for a break leads to the rejection of the unit root hypothesis for Taiwan only. Important implications are provided. First, considering the presence of a break in testing for nonstationarity is important or false conclusions can be drawn. Second, given the stationarity of GDP found for Taiwan only, investors should look beyond any local economic shocks and focus more on world economy development when investing in Taiwan. By contrast, investors in Mainland China and Hong Kong should pay attention to any shock because it is likely to be persistent. Third, relevant authorities should recognize that any government policy intended to promote long-run economic growth may be ineffective in Taiwan whereas it can be more effective in Mainland China and Hong Kong.

KEYWORDS:

• Unit root test
• break
• Great China Economic Area
• real GDP

JEL CLASSIFICATION:

• C22
• E30

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Arguments might exist about what models should be used to describe the data generation of the GDP series. We include the additive outlier rather than innovational outlier models because the break cannot be tested as the estimated break fraction is too small to be accurate under the innovational outlier models.

Additional information

Funding

This work was supported by the Jiangxi Normal University, China.