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

Søren Johansen, Katarina Juselius, Roman Frydman, Michael Goldberg

Research output: Working paperResearch

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Abstract

results on the test of overidentifying restrictions on ß'xt and the asymptotic variance for the stochastic trends parameters, a¿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 inflation 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
Original languageEnglish
PublisherDepartment of Economics, University of Copenhagen
Number of pages33
Publication statusPublished - 2007

Keywords

  • Faculty of Social Sciences
  • PPP puzzle
  • forward premium puzzle
  • cointegrated VAR
  • likelihood inference

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