Analyzing I(2) Systems by Transformed Vector Autoregressions

Hans Christian Kongsted and Heino Bohn Nielsen
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Hans Christian Kongsted: Institute of Economics, University of Copenhagen
Heino Bohn Nielsen: Institute of Economics, University of Copenhagen

No 02-20, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: We characterize the restrictions imposed by the minimal I(2)-to-I(1) transformation that underlies much applied work, e.g. on money demand relationships or open-economy pricing relationships. The relationship between the parameters of the original I(2) vector autoregression, including the coefficients of polynomially cointegrating relationships, and the transformed I(1) model is characterized. We discuss estimation of the transformed model subject to restrictions as well as the more commonly used approach of unrestricted reduced rank regression. Only a minor loss of efficiency is incurred by ignoring the restrictions in the empirical example and a simulation study. A properly transformed vector autoregression thus provides a practical and effective means for inference on the parameters of the I(2) model.

Keywords: cointegration; stochastic trend; price homogeneity; nominal; real; Monte Carlo experiment (search for similar items in EconPapers)
JEL-codes: C32 C51 C52 F41 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2002-11
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:0220

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