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Testing for Near I (2) Trends When the Signal to Noise Ratio is Small

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  • Katarina Juselius

    (Department of Economics, Copenhagen University)

Abstract

Researchers seldom find evidence of I (2) in exchange rates, prices, and other macroeconomics time series when they test the order of integration using univariate Dickey-Fuller tests. In contrast, when using the multivariate ML trace test we frequently find double unit roots in the data. Our paper demonstrates by simulations that this often happens when the signal-to-noise-ratio is small.

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File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2014/1401.pdf
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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 14-01.

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Length: 23 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:kud:kuiedp:1401

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  1. Charles Engel, 1994. "Can the Markov Switching Model Forecast Exchange Rates?," NBER Working Papers 4210, National Bureau of Economic Research, Inc.
  2. Yin-Wong Cheung & Ulf G. Erlandsson, 2004. "Exchange Rates and Markov Switching Dynamics," CESifo Working Paper Series 1348, CESifo Group Munich.
  3. Hans Christian Kongsted, 2003. "An I(2) cointegration analysis of small-country import price determination," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 53-71, 06.
  4. Yin-Wong Cheung & Kon S. Lai & Michael Bergman, 2003. "Dissecting the PPP Puzzle: The Unconventional Roles of Nominal Exchange Rate and Price Adjustment," CESifo Working Paper Series 924, CESifo Group Munich.
  5. Luca Fanelli & Emanuele Bacchiocchi, 2005. "Testing the purchasing power parity through I(2) cointegration techniques," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(6), pages 749-770.
  6. Kongsted, Hans Christian, 2005. "Testing the nominal-to-real transformation," Journal of Econometrics, Elsevier, vol. 124(2), pages 205-225, February.
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