| Abstract | The distinction as for whether macroeconomic variables are dominated by deterministic trend or stochastic trend relates to significant questions of forecast precision and the understanding of the latent data generating process, etc. The concept that a majority of macroeconomic variables are unit root process with an integration order of one or two has been widely accepted without the consideration of possible structural changes, which however, are common empirical features of the data and taking the form of smooth transitions. This paper emphasizes that the unit root perception needs to be reversed when taking into account of the structural breaks’ effects. Specifically this paper fits the data with possible breaks by Fourier approximation and converts the estimations of locations and styles of break into the appropriate frequency selection problem, which stands a difference from the existing literature. An examination of China’s 15 representative macroeconomic series indicates that only the common stock prices, RMB’s nominal and real effective exchange rates have good reasons to be regarded as realizations of unit root process, while others, including real GDP and foreign trades, are better regarded as trend stationary with smooth transitions. The inferences based on these results affirm that China’s real business cycles are indeed fluctuations around different deterministic trends when excluding the smooth transitions’ effects, it is not the noise component rather than the historical events correspond to those breaks have persistent effects. The results also support the argument that, as for the policy implications, large government-initiated shocks aimed at improving fundamentals may exert positive effects on the balanced growth path. |