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Multicointegration, polynomial cointegration and I(2) cointegration with structural breaks. An application to the sustainability of the US external deficit

Author

Listed:
  • Vanessa Berenguer-Rico

    (Faculty of Economics, Juan Carlos III.)

  • Josep Lluís Carrion-i-Silvestre

    (Faculty of Economics, University of Barcelona)

Abstract

In this paper we model the multicointegration relation, allowing for one structural break. Since multicointegration is a particular case of polynomial or I(2) cointegration, our proposal can also be applied in these cases. The paper proposes the use of a residualbased Dickey-Fuller class of statistic that accounts for one known or unknown structural break. Finite sample performance of the proposed statistic is investigated by using Monte Carlo simulations, which reveals that the statistic shows good properties in terms of empirical size and power. We complete the study with an empirical application of the sustainability of the US external deficit. Contrary to existing evidence, the consideration of one structural break leads to conclude in favour of the sustainability of the US external deficit.

Suggested Citation

  • Vanessa Berenguer-Rico & Josep Lluís Carrion-i-Silvestre, 2007. "Multicointegration, polynomial cointegration and I(2) cointegration with structural breaks. An application to the sustainability of the US external deficit," IREA Working Papers 200709, University of Barcelona, Research Institute of Applied Economics, revised May 2007.
    • Handle: RePEc:ira:wpaper:200709
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    File URL: http://www.ub.edu/irea/working_papers/2007/200709.pdf
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    Keywords

    I(2) processes; multicointegration; polynomial cointegration; structural break; sustainability of external deficit.;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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