# Bubbles or Volatility: A Markov-Switching Unit Root Test with Regime-Varying Error Variance

We demonstrate that the constant variance assumption in the Markov-switching Augmented Dickey-Fuller (ADF) test proposed by Hall, Psaradakis and Sola (1999) may result in the misjudgement of bubbles. Upon relaxing this assumption to allow for regime-varying error variances in the Markov-switching… ADF test (referred to as the MSADF-RV test), we revisit the integration properties of the money base, consumer price and exchange rate in Argentina from January 1983 to November 1989. Based on the MSADF-RV test, we observe the occurrence of volatility switches in the exchange rate and the consumer price instead of observing bubbles in these two series as in Hall, Psaradakis and Sola (1999)