Søren Johansen (Department of Economics, University of Copenhagen) Katarina Juselius (Department of Economics, University of Copenhagen) Roman Frydman (New York University) Michael Goldberg (University of New Hampshire)
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This 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 β’xt and the asymptotic variance for the stochastic trends parameters, α⊥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 inflation 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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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number
07-34.
Length: 25 pages Date of creation: Dec 2007 Date of revision: Handle: RePEc:kud:kuiedp:0734
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