Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework

Abstract

This paper develops a cointegrating nonlinear autoregressive distributed lag (NARDL) model in which short- and long-run nonlinearities are introduced via positive and negative partial sum decompositions of the explanatory variables. We demonstrate that the model is estimable by OLS and that reliable long-run inference can be achieved by bounds-testing regardless of the integration orders of the variables. Furthermore, we derive asymmetric dynamic multipliers that graphically depict the traverse between the short- and the long-run. The salient features of the model are illustrated using the example of the nonlinear unemployment-output relationship in the US, Canada and Japan.

Keywords: Asymmetric Cointegrating Relationships, Asymmetric Dynamic Multipliers, Nonlinear ARDL (NARDL) ECM-based Estimation and Tests, Nonlinear Unemployment-Output Relationship, Asymmetric Gasoline Price Adjustment

JEL Classification: C12, C13, J64