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A Residual-based Test For Multicointegration In Models With Structural Breaks And Threshold Adjustment To Steady State

Cassim, Lucius (2020): A Residual-based Test For Multicointegration In Models With Structural Breaks And Threshold Adjustment To Steady State.

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Abstract

In this paper I derive a test of Multicointegration of I (2) series that takes into account both structural breaks and threshold adjustment to steady state. I extend the I(2) –multicointegration test proposed by Berenguer-Rico and Carrion-i-Silvestre (2005), by relaxing the assumption of symmetric adjustment. In a way, I adapt the Engsted et al. (1997) approach to the concept of multicointegration and following Enders and Siklos (2001) I model the multicointegration relation while allowing for asymmetric adjustment to long run equilibrium. Further, use is made of the multivariate invariance principle, the weak convergence to stochastic integrals for dependent heterogeneous processes, and the continuous mapping theorem in order to derive an augmented Dickey-Fuller type of multicointegration test for I (2) series. I find that the limiting distributions of the estimators and test statistics associated with multicointegration depend on the cut-off point of the asymmetric response and the break point. I illustrate the test by applying it to understanding interest rate pass-through in Malawi. The derived multicointegration test confirms the presence of multicointegration among lending rates, policy rate and Treasury bill rates in Malawi in which lending rates adjust asymmetrically to steady state following a positive or negative policy rate adjustment.

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