Department of Economics and Business Economics

An I(2) Cointegration Model with Piecewise Linear Trends: Likelihood Analysis and Application

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  • Rp09 28

    Final published version, 359 KB, PDF document

  • Takamitsu Kurita, Fukuoka University, Japan
  • Heino Bohn Nielsen, University of Copenhagen, Denmark
  • Anders Rahbæk, Denmark
  • School of Economics and Management
This paper presents likelihood analysis of the I(2) cointegrated vector
autoregression with piecewise linear deterministic terms. Limiting behavior of the
maximum likelihood estimators are derived, which is used to further derive the limiting
distribution of the likelihood ratio statistic for the cointegration ranks, extending
the result for I(2) models with a linear trend in Nielsen and Rahbek (2007) and for
I(1) models with piecewise linear trends in Johansen, Mosconi, and Nielsen (2000).
The provided asymptotic theory extends also the results in Johansen, Juselius, Frydman,
and Goldberg (2009) where asymptotic inference is discussed in detail for one
of the cointegration parameters. To illustrate, an empirical analysis of US consumption,
income and wealth, 1965 - 2008, is performed, emphasizing the importance of
a change in nominal price trends after 1980.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages26
Publication statusPublished - 2009

    Research areas

  • Cointegration, I(2), Piecewise linear trends, Likelihood analysis, US consumption

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