On the Behaviour of Phillips–Perron Tests in the Presence of Persistent Cycles

<jats:title>Abstract</jats:title><jats:p>In this paper, we analyse the impact of persistent cycles on the well‐known semi‐parametric unit root tests of Phillips and Perron (1988, <jats:italic>Biometrika</jats:italic>, Vol. 75, pp. 335–346). It is shown, both analytically and through Monte Carlo simulations, that the presence of complex (near) unit roots can severely bias the size properties of these tests. Given the popularity of these tests with applied researchers and their routine presence in most econometric software packages, the results presented in this paper suggest that practitioners should treat the outcomes of these tests with some caution when applied to data which display a strong cyclical component.</jats:p>