Estimating the Lqac Model with I(2) Variables

Working Paper 1996-1

21 Pages Posted: 19 Mar 1996

See all articles by Niels Haldrup

Niels Haldrup

Aarhus University, School of Economics and Management; CREATES

Tom Engsted

University of Aarhus - CREATES

Date Written: January 1996

Abstract

This paper derives a method for estimating and testing the Linear Quadratic Adjustment Cost (LQAC) model when the target variable and some of the forcing variables follow I(2) processes. Based on a forward-looking error-correction formulation of the model it is shown how to obtain strongly consistent estimates of the structural long-run parameters and the adjustment cost parameter from both a linear and a non-linear cointegrating regression, where first-differences of the I(2) variables are included as regressors (multicointegration). Further, based on the estimated parameter values, it is shown how to test and evaluate the LQAC model using a VAR approach. In an empirical application using UK money demand data, the non-linear multi-cointegrating regression delivers an economically plausible estimate of the adjustment cost parameter. However, the exact restrictions implied by the LQAC model under rational expectations are strongly rejected.

JEL Classification: C10, C12, C32, E24

Suggested Citation

Haldrup, Niels and Engsted, Tom, Estimating the Lqac Model with I(2) Variables (January 1996). Working Paper 1996-1. Available at SSRN: https://ssrn.com/abstract=15089 or http://dx.doi.org/10.2139/ssrn.15089

Niels Haldrup (Contact Author)

Aarhus University, School of Economics and Management ( email )

Universitetsparken
Aarhus, DK 8000 C
Denmark
+45 8942 1133 (Phone)
+45-8613-6334 (Fax)

CREATES ( email )

School of Economics and Management
Aarhus University
Aarhus, DK 8000 C
Denmark
+4589421613 (Phone)

HOME PAGE: http://www.creates.au.dk/en

Tom Engsted

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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