Testing hypotheses in an I(2) model with applications to the persistent long swings in the Dmk/$ rate
AbstractThis 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 beta’xt and the asymptotic variance for the stochas- tic trends parameters, alpha 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 in.ation 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.
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Date of creation: 15 Jan 2008
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PPP puzzle; Forward premium puzzle; cointegrated VAR; likelihood inference;
Other versions of this item:
- Søren Johansen & Katarina Juselius & Roman Frydman & Michael Goldberg, 2007. "Testing Hypotheses in an I(2) Model with Applications to the Persistent Long Swings in the Dmk/$ Rate," Discussion Papers 07-34, University of Copenhagen. Department of Economics.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-27 (All new papers)
- NEP-CBA-2008-06-27 (Central Banking)
- NEP-ETS-2008-06-27 (Econometric Time Series)
- NEP-IFN-2008-06-27 (International Finance)
- NEP-OPM-2008-06-27 (Open Economy Macroeconomic)
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