Multiple Trend Breaks and Unit Root Hypothesis: Empirical Evidence from China's GDP(1952-2006)

Whether shocks to macroeconomic time series should be regarded as permanent or temporary has been an ongoing debate. Under the unit root hypothesis random shocks have a permanent effect on the system, and the alternative is that fluctuations are transitory. We apply the ADF test on the real GDP series of China from 1952 to 2006 by allowing for the possibility of two exogenous break points happened in 1961 and 1989 respectively. We find more evidence against the unit root hypothesis, meaning that the shocks on China's economy system are transitory except some significant events like the Great Natural Disaster in 1961 and the economy of China always grows around a stable trend path.