Testing Hypotheses in an I(2) Model with Applications to the Persistent Long Swings in the Dmk/$ Rate

TY - UNPB

T1 - Testing Hypotheses in an I(2) Model with Applications to the Persistent Long Swings in the Dmk/$ Rate

AU - Johansen, Søren

AU - Juselius, Katarina

AU - Frydman, Roman

AU - Goldberg, Michael

N1 - JEL Classification: C32, C52, F41

PY - 2007

Y1 - 2007

N2 - results on the test of overidentifying restrictions on ß'xt and the asymptotic variance for the stochastic trends parameters, a¿1: How to specify deterministic components in the I(2) model is discussed at some length. Model specification and tests are illustrated with an empirical analysis of long and persistent swings in the foreign exchange market between Germany and USA. The data analyzed consist of nominal exchange rates, relative prices, US inflation rate, two long-term interest rates and two short-term interest rates over the 1975-1999 period. One important aim of the paper is to demonstrate that by structuring the data with the help of the I(2) model one can achieve a better understanding of the empirical regularities underlying the persistent swings in nominal exchange rates, typical in periods of floating exchange rates

AB - results on the test of overidentifying restrictions on ß'xt and the asymptotic variance for the stochastic trends parameters, a¿1: How to specify deterministic components in the I(2) model is discussed at some length. Model specification and tests are illustrated with an empirical analysis of long and persistent swings in the foreign exchange market between Germany and USA. The data analyzed consist of nominal exchange rates, relative prices, US inflation rate, two long-term interest rates and two short-term interest rates over the 1975-1999 period. One important aim of the paper is to demonstrate that by structuring the data with the help of the I(2) model one can achieve a better understanding of the empirical regularities underlying the persistent swings in nominal exchange rates, typical in periods of floating exchange rates

KW - Faculty of Social Sciences

KW - PPP puzzle

KW - forward premium puzzle

KW - cointegrated VAR

KW - likelihood inference

M3 - Working paper

BT - Testing Hypotheses in an I(2) Model with Applications to the Persistent Long Swings in the Dmk/$ Rate

PB - Department of Economics, University of Copenhagen

ER -