“…4 The existing literature on cointegration and 'structural'breaks has essentially focused on developing procedures to detect breaks or to estimate the temporal location of eventual parameter shifts (see, for example, Hansen, 1992a, Quintos, 1997, Seo, 1998, Hansen and Johansen, 1999and Lutkepohl, Saikkonen, and Trenkler, 2003. Nevertheless, a few modelling devices that take into account temporary or permanent, smooth or dramatic shifts in economic cointegrated relationships have also been considered: 'threshold'cointegration as in Blake and Fomby (1997), where the equilibrium error follows a threshold autoregression that is meanreverting outside a given range and has a unit root inside the range; 'Markov-switching' cointegration as in Hall, Psaradakis, and Sola (1997) We pursue an alternative, ‡exible approach, along the lines of Psaradakis, Sola and Spagnolo (2004). Let Y t = (y t ; X 0 t ) 0 with Y t 2 < k ; y t 2 < and X t 2 < k 1 : In its triangular representation, the model is de…ned as…”