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Nonlinear Error-Correction Models for Interest Rates in The Netherlands

Author

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  • van Dijk, D.J.C.
  • Franses, Ph.H.B.F.

Abstract

In this paper we investigate empirical specification of smooth transition error correction models (STECMs). These models can be used to describe linear long-run relationships between nonstationary variables where adjustment towards equilibrium is nonlinear and can depend on exogenous variables. The various steps involved in specifying an appropriate model are discussed for a monthly bivariate interest rate series for The Netherlands. Using simulations we first establish that standard (linearity-based) cointegration tests can be used to examine joint long-run properties. Second, we apply various tests for nonlinearity to decide on an appropriate function for the adjustment of disequilibrium errors. When we estimate an STECM, we find indications that nonlinearity is due to only two observations. We investigate the relevance of these data points by applying robust tests for linearity and by considering less aggregated, i.e. weekly, data. We conclude with some suggestions for practitioners.

Suggested Citation

  • van Dijk, D.J.C. & Franses, Ph.H.B.F., 1997. "Nonlinear Error-Correction Models for Interest Rates in The Netherlands," Econometric Institute Research Papers EI 9704-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  • Handle: RePEc:ems:eureir:1421
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    Cited by:

    1. Jerry Coakley & Ana-Maria Fuertes, 2002. "Asymmetric dynamics in UK real interest rates," Applied Financial Economics, Taylor & Francis Journals, vol. 12(6), pages 379-387.
    2. Roberto Golinelli, 1998. "Fatti stilizzati e metodi econometrici "moderni": una rivisitazione della curva di Phillips per l'Italia (1951-1996)," Politica economica, Società editrice il Mulino, issue 3, pages 411-446.
    3. Samuel S Jibao & Niek Schoeman & Ruthira Naraidoo, 2010. "Fiscal Regime Changes and the Sustainability of Fiscal Imbalance in South Africa: A Smooth Transition Error-Correction Approach," Working Papers 201023, University of Pretoria, Department of Economics.
    4. Gilles Dufrénot & Valérie Mignon, 2002. "La cointégration non linéaire : une note méthodologique," Economie & Prévision, La Documentation Française, vol. 155(4), pages 117-137.
    5. Jerry Coakley & Ana-Maria Fuertes, 2001. "Nonparametric cointegration analysis of real exchange rates," Applied Financial Economics, Taylor & Francis Journals, vol. 11(1), pages 1-8.
    6. R. Golinelli, 1998. "Fatti stilizzati e metodi econometrici "Moderni": una rivalutazione della Curva di Phillips per l'Italia (1951-1996)," Working Papers 313, Dipartimento Scienze Economiche, Universita' di Bologna.

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