Unit root with structural breaks in Macroeconomic time series: Evidence from Pakistan

The stationarity property of 32 Macroeconomic annual time series for Pakistan are tested by using both simple ADF and Lee and Strazicich (2003, 2004) Lagrange Multiplier (LM) unit root test. The conventional ADF test detects all variables except five to be stationary. However, the LM test based Lee and Strazicich unit root accommodating upto two endogenously determined structural breaks rejects the null of unit root at 5 percent level of significance or better, across four models for ten to eleven macroeconomic time series. Moreover, the significant break points are observed mostly clustered around important events like Indo-Pak border conflicts (1971, 1999), Military Coups (1977, 1999) and natural disasters, such as, drought (2000) and Kashmir earthquake (2005). The study thus concludes structural break unit root test as a better framework for the analysis of time series properties of macroeconomic variables.