The Fourier approximation and testing for the null of cointegration

Ching-Chuan Tsong (), Cheng-Feng Lee (), Li-Ju Tsai () and Te-Chung Hu ()
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Ching-Chuan Tsong: National Chi Nan University
Cheng-Feng Lee: National Kaohsiung University of Applied Sciences
Li-Ju Tsai: Fu Jen Catholic University
Te-Chung Hu: National Kaohsiung University of Applied Sciences

Empirical Economics, 2016, vol. 51, issue 3, No 10, 1085-1113

Abstract: Abstract In this paper, we propose a test to investigate the null of cointegration allowing for structural breaks of unknown form in deterministic trend by using the Fourier form. The test is developed on the basis of the fact that structural breaks of unknown form can be approximated with a low-frequency Fourier component. As a result, the statistic is able to test cointegration without estimating specific break dates. The asymptotic distribution of the test is derived, and the asymptotic critical values are tabulated. Simulation experiments show that the test can deliver robust type I error for various breaks commonly seen in economic analysis and have good power, even in small sample sizes encountered in empirical studies. Our test is applied to analyze the issue of fiscal sustainability in the nine OECD countries with a high debt-to-GDP ratio.

Keywords: Cointegration; Fourier approximation; Structural change; Fiscal sustainability (search for similar items in EconPapers)
JEL-codes: C32 F31 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (19)

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DOI: 10.1007/s00181-015-1028-6

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