A0920
Title: Testing linear cointegration against smooth transition cointegration
Authors: Martin Wagner - University of Klagenfurt, Bank of Slovenia and Institute for Advanced Studies, Vienna (Austria) [presenting]
Oliver Stypka - TU 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. The integrated variables and time are considered transition variables. For the integrated modified OLS-based test, the fixed-b inference is additionally developed. The properties of the tests are evaluated with a simulation study and compared to the test proposed in a previous study. Finally, the tests are applied to investigate money demand for eight countries or areas, including the euro area with data from 1995Q1 and the USA with data from 1964Q1. For interest rate and time as transition variables, there is a strong indication against the null of linearity.
