Research Discussion Papers, Bank of Finland
Cointegrated Vector Autoregressive Processes with Continuous Structural Changes
() and Pentti Saikkonen
Abstract: We extend the conventional cointegrated VAR model to allow
for general nonlinear deterministic trends. These nonlinear trends can be
used to model gradual structural changes in the intercept term of the
cointegrating relations. A general asymptotic theory of estimation and
statistical inference is reviewed and a diagnostic test for testing the
correct specification of an employed nonlinear trend is developed. The
methods are applied to Finnish interest rate data. A smooth level shift of
the logistic form between the own-yield of broad money and the short-term
money market rate is found appropriate for these data. The level shift is
motivated by the deregulation of issuing certificates of deposit and its
inclusion in the model solves the puzzle of 'missing cointegration vector'
found in a previous study.
Keywords: cointegrated VAR model; gradual structural change; nonlinear deterministic trend; (follow links to similar papers)
29 pages, December 16, 1998
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