NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Nonrenewable Resource Prices: Deterministic or Stochastic Trends?

Junsoo Lee, John A. List, Mark Strazicich

NBER Working Paper No. 11487
Issued in July 2005
NBER Program(s):   AG

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.

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Document Object Identifier (DOI): 10.3386/w11487

Published: Lee, Junsoo, John A. List and Mark C. Strazicich. "Non-renewable Resource Prices: Deterministic Or Stochastic Trends?," Journal of Environmental Economics and Management, 2006, v51(3,May), 354-370. citation courtesy of

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