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intertemporal elasticities of substitution between private and foreign capital.

Table 3 (part B) also presents the results of running an ADF test (one lag) for the variables in both level and differenced form under the assumption of a stochastic trend with drift only. It can be readily seen that all the variables in level form are nonstationary; i.e., they appear to follow a stochastic trend with (positive) drift [Nelson and Plosser, 1982].9 In first differences, however, the null hypothesis of non-stationarity is rejected for all variables (except one) at least at the 5 percent level.10 Thus, the evidence presented above suggests that the variables in question follow primarily a stochastic trend with (upward) drift as opposed to a deterministic one, although the possibility that for given sub-periods they follow a mixed process cannot be rejected. TABLE 3A Chile: Unit Root Tests for Stationarity with Constant and Time Trend Sample Period 1960-2000 Variables Levels First Difference 5% Critical Value1 1% Critical Value ln(Y) -1.38 -4.04** -3.53 -4.21 ln(Y/L) -0.86 -3.98** -3.54 -4.21 lnL -0.20 -6.78*** -3.54 -4.21 lnKf -1.93 -3.53** -3.53 -4.21 lnKp -2.83 -3.24* -3.53 -4.21 lnKg -2.47 -3.25* -3.53 -4.21 TOT -1.71 -5.01*** -3.53 -4.21 1 MacKinnon critical values for rejection of hypothesis of a unit root. *, **, and *** denote significance at the 10, 5 and 1 percent levels, respectively. TABLE 3B Chile: Unit Root Tests for Stationarity with Constant Only Sample Period 1960-2000 Variables Levels First Difference 5% Critical Value3 1% Critical Value ln(Y) 0.26 -3.99*** -2.93 -3.61 ln(Y/L) -0.80 -3.84*** -2.93 -3.61 lnL -1.20 -2.95** -2.93 -3.61 lnKf 0.98 -2.91* -2.93 -3.61 lnKp 0.32 -3.24** -2.93 -3.61 lnKg -0.63 -3.71*** -2.93 -3.61 TOT -1.64 -4.95*** -2.93 -3.61 3 MacKinnon critical values for rejection of hypothesis of a unit root. *, **, and *** denote significance at the 10, 5 and 1 percent levels, respectively. Given that the variables are integrated of order one, I(1), it is necessary to determine whether there exists a stable and non-spurious (cointegrated) relationship among the regressors in level form in each of the relevant specifications. The necessity arises because applying first differences to the logarithms of the variables in question leads to a loss of information regarding the long-run properties of the estimated model; i.e., a model evaluated in difference form is misspecified because it does not have a longrun solution. In order to preserve this important information the cointegration method first proposed by Johansen [1988] and Johansen and Juselius [1990] was employed