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

Soren Johansen (), Katarina Juselius, Roman Frydman and Michael Goldberg
Additional contact information
Roman Frydman: New York University
Michael Goldberg: University of New Hampshire

No 07-34, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This paper discusses a number of likelihood ratio tests on long-run relations and common trends in the I(2) model and provide new results on the test of overidentifying restrictions on β’xt and the asymptotic variance for the stochastic trends parameters, α⊥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

Keywords: PPP puzzle; forward premium puzzle; cointegrated VAR; likelihood inference (search for similar items in EconPapers)
JEL-codes: C32 C52 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ets and nep-ifn
Date: 2007-12

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Working Paper: Testing hypotheses in an I(2) model with applications to the persistent long swings in the Dmk/$ rate (2008)
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