Title: Testing linear cointegration against smooth transition cointegration
Authors: Martin Wagner - University of Klagenfurt (Austria) [presenting]
Oliver Stypka - Technical University Dortmund (Germany)
Abstract: Simple tests are developed for the null hypothesis of linear cointegration against the alternative of smooth transition cointegration. The test statistics are based on the fully modified or integrated modified OLS estimators suitably modified to Taylor approximations of smooth transition functions. This necessitates the adaptation of the above estimation approaches to models including cross-products of integrated regressors. As transition variable we consider integrated variables and time. For the integrated modified OLS based test we additionally develop fixed-b inference. The properties of the tests are evaluated with a simulation study and compared to a previous test. Finally, we apply our tests to investigate money demand for eight countries or areas, inter alia the Euro Money Area with data from 1995Q1 and the USA with data from 1964Q1. For interest rate and time as transition variable there is strong indication against the null of linearity.