Are Shocks to Real Output Permanent or Transitory? Evidence from a Panel of Pacific Island Countries

This paper applies conventional panel unit root tests and panel stationarity tests with and without structural breaks to examine the time series properties of real Gross Domestic Product (GDP) per capita for a panel of eight Pacific Island economies. The panel unit root and panel stationarity tests without structural breaks suggest that for the panel as a whole real GDP per capita contains a unit root. However, the panel stationarity test, which accommodates structural change in the trend function, finds clear-cut evidence in favour of regime-wise trend stationarity in real GDP per capita. This result points to the importance of taking structural breaks into account. This finding implies that over the period considered for the panel of Pacific Island countries as a whole, the permanent secular component of output was dominated by transitory fluctuations accompanied by infrequent changes in the trend function. The only exceptions are Fiji and Kiribati, for which individual stationarity tests with multiple structural breaks suggest that real GDP per capita contains a unit root. * Department of Economics, Monash University, Clyde Road Berwick 3086, Australia. † School of Economics, University of the South Pacific, Suva, Fiji Islands. ‡ Department of Economics, Monash University, 900 Dandenong Road, Caulfield East, VIC. 3145, Australia. We thank Josep Lluís Carrion-i-Silvestre for providing his GAUSS code © 2008 Vinod Mishra, Susan Sharma and Russell Smyth All rights reserved. No part of this paper may be reproduced in any form, or stored in a retrieval system, without the prior written permission of the author. ARE SHOCKS TO REAL OUTPUT PERMANENT OR TRANSITORY? EVIDENCE FROM A PANEL OF PACIFIC ISLAND COUNTRIES