| Abstract: |
In this paper we examine temporal properties of eleven natural resource real
price series from 1870-1990 by employing a Lagrangian Multiplier unit root
test that allows for two endogenously determined structural breaks with and
without a quadratic trend. Contrary to previous research, we find evidence
against the unit root hypothesis for all price series. Our findings support
characterizing natural resource prices as stationary around deterministic
trends with structural breaks. This result is important in both a positive and
normative sense. For example, without an appropriate understanding of the
dynamics of a time series, empirical verification of theories, forecasting,
and proper inference are potentially fruitless. More generally, we show that
both pre-testing for unit roots with breaks and allowing for breaks in the
forecast model can improve forecast accuracy. |