Testing hypotheses in an I(2) model with piecewise linear trends. An analysis of the persistent long swings in the Dmk/$ rate

TY - JOUR

T1 - Testing hypotheses in an I(2) model with piecewise linear trends. An analysis of 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 - 2010/9

Y1 - 2010/9

N2 - This paper discusses the I(2) model with breaks in the deterministic component and illustrates the model with an analysis of German and US prices, exchange rates, and interest rates in the period 19751999. It provides new results on the likelihood ratio test of overidentifying restrictions on the cointegrating relations when they contain piecewise linear trends. One important aim of the paper is to demonstrate that a structured I(2) analysis is useful for a better understanding of the empirical regularities underlying the persistent swings in nominal exchange rates, typical in periods of floating exchange rates.

AB - This paper discusses the I(2) model with breaks in the deterministic component and illustrates the model with an analysis of German and US prices, exchange rates, and interest rates in the period 19751999. It provides new results on the likelihood ratio test of overidentifying restrictions on the cointegrating relations when they contain piecewise linear trends. One important aim of the paper is to demonstrate that a structured I(2) analysis is useful for 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

KW - long swings puzzle

KW - cointegrated VAR

KW - test of overidentification

U2 - 10.1016/j.jeconom.2010.03.018

DO - 10.1016/j.jeconom.2010.03.018

M3 - Journal article

SN - 0304-4076

VL - 158

SP - 117

EP - 129

JO - Journal of Econometrics

JF - Journal of Econometrics

IS - 1

ER -