Title: Testing linear cointegration against smooth transition cointegration: Theory and an application to long-run money demand
Authors: Oliver Stypka - Technical University Dortmund (Germany)
Martin Wagner - University of Klagenfurt (Austria) [presenting]
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 extensions of the fully modified and integrated modified OLS estimators to render them applicable to Taylor approximations of smooth transition functions. We consider both integrated variables as well as time as transition variables. For the integrated modified OLS based tests we consider in addition to standard asymptotic inference also fixed-$b$ inference. The properties of our tests are assessed by means of a simulation study that also includes a previous test as benchmark. Finally, we apply our tests to investigate linearity respectively stability of long-run money demand for a number of individual countries as well as the Euro area. We find strong evidence against linearity and stability of long-run money demand.