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Threshold effects In multivariate error correction models

  • Gonzalo, Jesùs
  • Pitarakis, Jean-Yves

In this paper we propose a testing procedure for assessing the presence of threshold effects in nonstationary Vector autoregressive models with or without cointegration. Our approach involves first testing whether the long run impact matrix characterising the VECM type representation of the VAR switches according to the magnitude of some threshold variable and is valid regardless of whether the system is purely I(1), I(1) with cointegration or stationary. Once the potential presence of threshold effects is established we subsequently evaluate the cointegrating properties of the system in each regime through a model selection based approach whose asymptotic and finite sample properties are also established. This subsequently allows us to introduce a novel non-linear permanent and transitory decomposition of the vector process of interest.

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File URL: http://eprints.soton.ac.uk/34547/1/2005-11-16.pdf
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Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 0501.

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Date of creation: 01 Jan 2005
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Handle: RePEc:stn:sotoec:0501
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  24. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
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