The power of modified instrumental variables tests for unit roots

Abstract

SUMMARY In this paper we investigate the power of Hall's (1989) instrumental variables tests for unit roots. A slight modification is made to Hall's t statistic so that the modified t statistic can be applied directly without encountering the possible negative standard error problem of Hall's original t statistic. The major finding is that the power curves of the instrumental variables tests are not monotonic functions of the autoregressive coefficient of the unit root models when there is a negative moving average component.