Breaking Trends and the Prebisch-Singer Hypothesis: A Further Investigation

• Activity Number: 180
• Type: Contributed
• Date/Time: Monday, August 1, 2011 : 10:30 AM to 12:20 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Mohitosh Kejriwal*+
• Companies: Purdue University
• Keywords: structural breaks ; trend functions ; Prebisch-Singer Hypothesis ; unit roots ; primary commodity prices

Abstract

This paper examines the Prebisch-Singer Hypothesis employing new time series procedures that are robust to the nature of persistence in the commodity price shocks, thereby obviating the need for unit root pretesting. Specifically, the procedures allow consistent estimation of the number of structural breaks in the trend function as well as facilitate the distinction between trend breaks and pure level shifts. In comparison with past studies, we find fewer cases of commodities that display negative trends thereby weakening the case for the Prebisch-Singer Hypothesis. Finally, a new set of powerful unit root tests allowing for structural breaks under both the null and alternative hypotheses is applied to determine whether the underlying commodity price series can be characterized as difference or trend stationary processes. Relative to the extant literature, we find more evidence in favor of trend stationarity suggesting that real commodity price shocks are mostly of a transitory nature.

This paper is based on joint work with Atanu Ghoshray (University of Bath) and Mark Wohar (University of Nebraska-Omaha).