Title: Multiple long-run equilibria through cointegration eyes
Authors: Jesus Gonzalo Munoz - Universidad Carlos III de Madrid (Spain) [presenting]
Jun Yi Peng - Universidad Carlos III de Madrid (Spain)
Abstract: Cointegration has succeeded in capturing the unique long-run linear equilibrium. Specific non-linearities have been incorporated into cointegrated models but always assuming the existence of a single equilibrium. We explore the possibility of different long-run equilibria depending on the state of the world (i.e., good and bad times, optimism and pessimism, frictional coordination) in a threshold framework. Starting from the present-value model (PVM) with different discount factors and depending on the state of the economy, we show that this type of PVM implies threshold cointegrated with different long-run equilibria. We present the estimation and inference theory. Two applications where the variables are not linearly cointegrated but threshold cointegrated are presented.