Using stochastic growth models to understand unit roots and breaking trends

Abstract

This paper provides economic underpinnings for some recent econometric models of unit roots and breaking trends. It shows that in an endogenous growth model, difference stationarity is present in every growing variable; and this phenomenon is generated by the propagation mechanism of the model. For an exogenous growth model, either difference stationarity or trend stationarity may be present, depending on the nature of external impulses. Regarding long-run growth rates, permanent changes in economic fundamentals lead to segmented trends in endogenous growth models, but only shifting trends in exogenous growth models.