Friday, October 22, 2010

Tests for Non-Linear Cointegration

It took more than 25 years since the discovery of cointegration for someone to come up with general tests of cointegration in nonlinear regression models. Choi and Saikkonen published a paper on the topic in the June issue of Econometric Theory. One place where this might be relevant is, of course the environmental Kuznets curve, where Martin Wagner argued that standard cointegration methods could not be applied to a model that included powers of the explanatory variables. Wagner has a paper with Seung Hyun Hong on just this topic. But a lot of standard models such as the translog consumer demand model involve non-linear functions. So this is a very useful advance.

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