Are shocks to real output permanent or transitory? Evidence from a panel of Pacific Island countries

Panel unit root and stationarity tests without structural breaks suggest that for eight Pacific island economies real gross domestic product (GDP) per capita contains a unit root. The panel stationarity test that accommodates structural change in the trend function, however, finds evidence in favour of regimewise trend stationarity. This result points to the importance of taking structural breaks into account. The finding implies that, for the period considered, the permanent secular component of output is dominated by transitory fluctuations accompanied by infrequent changes in the trend function. The only exceptions are Fiji and Kiribati, for which individual stationarity tests with multiple structural breaks suggest that real GDP per capita contains a unit root.