Testing Hypotheses in an I(2) Model with Applications to the Persistent Long Swings in the Dmk/$ Rate

CREATES Research Paper 2008-3

35 Pages Posted: 25 Jun 2008

See all articles by Soren Johansen

Soren Johansen

University of Copenhagen - Department of Economics; Aarhus University - CREATES

Katarina Juselius

University of Copenhagen - Department of Economics

Roman Frydman

New York University (NYU) - Department of Economics

Michael D. Goldberg

University of New Hampshire

Date Written: January 18, 2008

Abstract

This paper discusses a number of likelihood ratio tests on long-run relations and common trends in the I(2) model and provide new results on the test of overidentifying restrictions on betaxt and the asymptotic variance for the stochastic trends parameters, alpha 1: How to specify deterministic components in the I(2)model is discussed at some length. Model specification and tests are illustrated with an empirical analysis of long and persistent swings in the foreign exchange market between Germany and USA. The data analyzed consist of nominal exchange rates, relative prices, US in.ation rate, two long-term interest rates and two short-term interest rates over the 1975-1999 period. One important aim of the paper is to demonstrate that by structuring the data with the help of the I(2) model one can achieve a better understanding of the empirical regularities underlying the persistent swings in nominal exchange rates, typical in periods of floating exchange rates.

Keywords: PPP puzzle, Forward premium puzzle, cointegrated VAR, likelihood inference

JEL Classification: C32, C52, F41

Suggested Citation

Johansen, Soren and Juselius, Katarina and Frydman, Roman and Goldberg, Michael D., Testing Hypotheses in an I(2) Model with Applications to the Persistent Long Swings in the Dmk/$ Rate (January 18, 2008). CREATES Research Paper 2008-3. Available at SSRN: https://ssrn.com/abstract=1148111 or http://dx.doi.org/10.2139/ssrn.1148111

Soren Johansen (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Aarhus University - CREATES ( email )

Nordre Ringgade 1
Aarhus, DK-8000
Denmark

Katarina Juselius

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Roman Frydman

New York University (NYU) - Department of Economics ( email )

19 West 4th Street
New York, NY 10012
United States

Michael D. Goldberg

University of New Hampshire ( email )

Durham, NH 03824
United States
603-862-3385 (Phone)
603-862-3383 (Fax)

HOME PAGE: http://pubpages.unh.edu/~michaelg/

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