Financial Development, Economic Growth and Financial Crisis in Asian Emerging Economies: Bai and Perron Test

It has been generally agreed that a structural break exists in time series data. In fact, visually checking the EG (real per capita GDP) plots in Appendixes 5 to 9, India seems to have a break around 1991, whereas the other four countries have prominent breaks over the period 1997-1998. We therefore consider it important to take the element of structural break into our analysis for obtaining more plausible estimates. To this end, the structural break in economic growth dummy (SBGD) is allocated by seeking structural break(s) in each country’s EG series through the test developed by Bai and Perron (hereafter the BP test).
The BP test specifies multiple structural changes in a linear regression model estimated by least squares, treating the dates of structural breaks as unknown and endogenous events. The rationale for performing the BP test is that it allows us to determine break points statistically and objectively not setting the break dates based on a priori information.
To eliminate autocorrelation in estimation, each EG-VAR has already been included: SGD and PCD for India; SGD and SFD for Indonesia; SFD and SFCD for Korea; SGD and SFCD for Malaysia; and SGD, SFD and SFCD for Thailand (Note 11). As reported in Table 2, the sample periods differ across the five countries due to data availability. Subsequently, we check the lag order selection statistics of each EG-VAR and set three lags for Korea, Malaysia and Thailand and four lags for India and Indonesia. Exhaust Emissions

Based on the break dates reported in Table 1, different SBGDs are created. Referring to Thailand’s two-break result, for instance, we produced SBGD as illustrated in Figure 1. Thus actually allocating each of those SBGDs — as the deterministic component outside the cointegrating vector — into each country’s VECM and ARDL estimations, we have detected that for both India and Indonesia, the one break result is the best (1990Q1 for India and 1997Q4 for Indonesia), whereas for Thailand, the two-break result (1997Q2 and 2003Q1). Here, the selection mainly depends on whether the SBGD allocation provides a single cointegration (r = 1) and/or no autocorrelation in estimation. However, SBGDs are not essential for both Korea and Malaysia. In Korea’s case, instead of the BP test, we have performed the Zivot and Andrew (hereafter ZA) test and detected a single structural break in 1997Q4 (Note 13). Based on this single break result, we allocate a zero-one dummy, which is named the ZA dummy (ZAD), in Korea’s estimation. On the other hand, in Malaysia’s case, any dummy allocations, which are specified either by the BP test or by the ZA test, do not provide better estimates, so that no SBGD is contained in Malaysia’s analysis. Finally, Table 2 shows the combinations of dummy variables that are included in the five countries’ assessments.

Table 1: Bai and Perron test results

Country Number of Break(s)
1 2 3 4
India 1990Q3 1990Q3 1998Q3; 1994Q2
1997Q1 1999Q3
Indonesia 1997Q4 1997Q1 1987Q1; 1997Q1
2002Q2 2002Q1
Korea 1998Q3 1996Q4 1988Q3; 1996Q4 1987Q4; 1992Q4
2001Q4 2001Q4 1997Q4; 2002Q4
Malaysia 1997Q1 1993Q2 1988Q1; 1995Q1
2000Q2 2000Q2
Thailand 1997Q3 1997Q2 1994Q1; 1998Q3
2003Q1 2003Q1

Table 2: Sample periods and dummy variables included

Country Sample period Dummy variables
India 1982Q1 to 2007Q4 SGD; SBGD (one break); PCD
Indonesia 1982Q1 to 2007Q4 SGD; SFD; SBGD(one break)
Korea 1983Q1 to 2007Q4 SFD; SFCD; ZAD
Malaysia 1982Q1 to 2007Q4 SGD; SFCD
Thailand 1986Q1 to 2007Q4 SGD; SFD; SFCD; SBGD (two breaks)


Figure 1: Thailand’s SBGD (two breaks)