Size distortions of tests of the null hypothesis of stationarity: evidence and implications for the PPP debate

Article Abstract:

Tests of the null hypothesis of stationarity against the unit root alternative play an increasingly important role in empirical work in macroeconomics and in international finance. We show that the use of conventional asymptotic critical values for stationarity tests may cause extreme size distortions, if the model under the null hypothesis is highly persistent. This fact calls into question the use of these tests in empirical work. We illustrate the practical importance of this point for tests of long-run purchasing power parity (PPP) under the recent float. We show that the common practice of viewing tests of stationarity as complementary to tests of the unit root null will tend to result in contradictions and in spurious rejections of long-run PPP. While the size distortions may be overcome by the use of finite-sample critical values, the resulting tests tend to have low power under economically plausible assumptions about the half-life of deviations from PPP. Thus, the fact that stationarity is not rejected cannot be interpreted as convincing evidence in favor of mean reversion. Only in the rare case that stationarity is rejected, do size-corrected tests shed light on the question of long-run PPP. JEL classification: F31; F41; C15; C22 Keywords: Purchasing power parity; Mean reversion; Finite-sample critical values; Real exchange rates

United States, Research, Brief Article, Finance

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Health insurance and preventive behavior

Article Abstract:

The cost of health insurance has increased in western economies, and prevention is seen as a way of tackling the problem. First best allocation can be achieved where there is full insurance to pay for curative care, as well as a compensation scheme of a non linear nature to pay for preventive care. This situation changes where insurers cannot observe non-negligible preventive activities. Physicians tend to increase their profits as the cost of patient care rises, and this is likely to affect the level of care where physicians are involved in decisions on care levels.

Economic aspects, Health care reform, Preventive medicine physicians

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