TIME-VARYING COINTEGRATION

Herman Bierens () and Luis Martins

Econometric Theory, 2010, vol. 26, issue 5, 1453-1490

Abstract: In this paper we propose a time-varying vector error correction model in which the cointegrating relationship varies smoothly over time. The Johansen setup is a special case of our model. A likelihood ratio test for time-invariant cointegration is defined and its asymptotic chi-square distribution is derived. We apply our test to the purchasing power parity hypothesis of international prices and nominal exchange rates, and we find evidence of time-varying cointegration.

Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:cup:etheor:v:26:y:2010:i:05:p:1453-1490_99

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