Cointegration and Threshold Adjustment

This article proposes an extension to the Engle-Granger testing strategy by permitting asymmetry in the adjustment toward equilibrium in two different ways. We demonstrate that our test has good power and size properties over the Engle-Granger test when there are asymmetric departures from equilibri...

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Bibliographic Details
Published in:Journal of business & economic statistics 2001-04, Vol.19 (2), p.166-176
Main Authors: Enders, Walter, Siklos, Pierre L
Format: Article
Language:English
Subjects:
Asymmetric adjustment
Business cycles
Central banks
Cointegration analysis
Consistent estimators
Critical values
Econometrics
Economic fluctuations
Economic models
Economic statistics
Equilibrium
Error correction & detection
Estimation
Federal funding
Federal funds rate
Federal Reserve monetary policy
GDP
Gross Domestic Product
Interest rates
Linear models
Long run equilibrium
Mathematical economics
Mathematical models
Monetary policy
Monte Carlo
Monte Carlo simulation
Nonlinear autoregression
Nonlinear programming
Null hypothesis
Regression analysis
Significance level
Statistical analysis
Statistics
Studies
Time series
Variables
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Summary:This article proposes an extension to the Engle-Granger testing strategy by permitting asymmetry in the adjustment toward equilibrium in two different ways. We demonstrate that our test has good power and size properties over the Engle-Granger test when there are asymmetric departures from equilibrium. We consider an application-namely, whether there exists cointegration among interest rates for instruments with different maturities. This issue has been widely tested with mixed results. We argue that either cautious policy, or possibly opportunistic behavior on the part of the Federal Reserve implies that an equilibrium relationship between short- and long-term interest rates exists but that adjustments from disequilibrium are asymmetric in nature. Empirical tests using U.S. yields confirm the asymmetric nature of error correction among interest rates of different maturities.
ISSN:0735-0015
1537-2707
DOI:10.1198/073500101316970395