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

  • Katarina Juselius

    (Department of Economics, Copenhagen University)

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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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. Franchi, Massimo & Jusélius, Katarina, 2007. "Taking a DSGE Model to the Data Meaningfully," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1, pages 1-38.
  2. Yin-wong Cheung & Kon S. Lai & Michael Bergman, 2003. "Dissecting the PPP Puzzle: The Unconventional Roles of Nominal Exchange Rate and Price Adjustments," Working Papers 102003, Hong Kong Institute for Monetary Research.
  3. Cheung, Yin-Wong & Erlandsson, Ulf G., 2005. "Exchange Rates and Markov Switching Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 314-320, July.
  4. Johansen, Søren & Juselius, Katarina & Frydman, Roman & Goldberg, Michael, 2010. "Testing hypotheses in an I(2) model with piecewise linear trends. An analysis of the persistent long swings in the Dmk/$ rate," Journal of Econometrics, Elsevier, vol. 158(1), pages 117-129, September.
  5. Charles Engel, 1992. "Can the Markov Switching Model Forecast Exchange Rates?," NBER Working Papers 4210, National Bureau of Economic Research, Inc.
  6. Juselius, Katarina, 1995. "Do purchasing power parity and uncovered interest rate parity hold in the long run? An example of likelihood inference in a multivariate time-series model," Journal of Econometrics, Elsevier, vol. 69(1), pages 211-240, September.
  7. 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.
  8. Kongsted, Hans Christian, 2005. "Testing the nominal-to-real transformation," Journal of Econometrics, Elsevier, vol. 124(2), pages 205-225, February.
  9. 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.
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