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Time-Varying Cointegration

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  • Bierens, Herman J.
  • Martins, Luis F.

Abstract

In this paper we propose a time-varying vector error correction model in which the cointegrating relationship varies smoothly over time. The Johansen setup is a special case of our model. A likelihood ratio test for time-invariant cointegration is defined and its asymptotic chi-square distribution is derived. We apply our test to the purchasing power parity hypothesis of international prices and nominal exchange rates, and we find evidence of time-varying cointegration.

Suggested Citation

  • Bierens, Herman J. & Martins, Luis F., 2010. "Time-Varying Cointegration," Econometric Theory, Cambridge University Press, vol. 26(05), pages 1453-1490, October.
  • Handle: RePEc:cup:etheor:v:26:y:2010:i:05:p:1453-1490_99
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