An I(2) Cointegration Model with Piecewise Linear Trends: Likelihood Analysis and Application

Takamitsu Kurita, Heino Bohn Nielsen and Anders Rahbek
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Takamitsu Kurita: Faculty of Economics, Fukuoka University, Postal: Faculty of Economics, Fukuoka University, Bunkei Center Building, 8-19-1 Nanakuma, Johnanku, Fukuoka, 814-0180, Japan
Heino Bohn Nielsen: Department of Economics, University of Copenhagen, Postal: Department of Economics, University of Copenhagen, Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper presents likelihood analysis of the I(2) cointegrated vector autoregression with piecewise linear deterministic terms. Limiting behavior of the maximum likelihood estimators are derived, which is used to further derive the limiting distribution of the likelihood ratio statistic for the cointegration ranks, extending the result for I(2) models with a linear trend in Nielsen and Rahbek (2007) and for I(1) models with piecewise linear trends in Johansen, Mosconi, and Nielsen (2000). The provided asymptotic theory extends also the results in Johansen, Juselius, Frydman, and Goldberg (2009) where asymptotic inference is discussed in detail for one of the cointegration parameters. To illustrate, an empirical analysis of US consumption, income and wealth, 1965 - 2008, is performed, emphasizing the importance of a change in nominal price trends after 1980.

Keywords: Cointegration; I(2); Piecewise linear trends; Likelihood analysis; US consumption (search for similar items in EconPapers)
JEL-codes: C32 (search for similar items in EconPapers)
Pages: 26
Date: 2009-07-06
New Economics Papers: this item is included in nep-ecm and nep-ets
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Working Paper: An I(2) Cointegration Model With Piecewise Linear Trends: Likelihood Analysis And Application (2009)
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