Threshold Effects in Cointegrating Relationships*

Gonzalo, Jesús; Pitarakis, Jean‐Yves

doi:10.1111/j.1468-0084.2006.00458.x

Cited by 88 publications

(54 citation statements)

References 37 publications

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“…Berenguer-Rico and Gonzalo (2014b) build on earlier work by Gonzalo and Pitarakis (2006) to develop a non-linear alternative to linear integration, based on the 'order of summability.' 6 The empirical procedure to determine the order of summability analyses the rate of convergence of a rescaled sum Y * k of the variable of interest y t .…”

Section: Methodsmentioning

confidence: 99%

Nonlinearities in the Relationship Between Debt and Growth: (No) Evidence From Over Two Centuries

Eberhardt

2017

Macroecon. Dynam.

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A note on versions:The version presented here may differ from the published version or from the version of record. If you wish to cite this item you are advised to consult the publisher's version. Please see the repository url above for details on accessing the published version and note that access may require a subscription.For more information, please contact eprints@nottingham.ac.uk Nonlinearities in the relationship between debt and growth: (no) evidence from over two centuries 2 Abstract: I revisit the popular concern over a nonlinearity or threshold in the relationship between public debt and growth employing long time series data from up to 27 countries. My empirical approach recognises that standard time series arguments for long-run equilibrium relations between integrated variables (cointegration) break down in nonlinear specifications such as those predominantly applied in the existing debt-growth literature. Adopting the novel co-summability approach my analysis overcomes these difficulties to find no evidence for a systematic long-run relationship between debt and growth in the bivariate and economic theory-based multivariate specifications popular in this literature.Keywords: public debt; economic growth; nonlinearity; summability and co-summability JEL classification: H63, C22, E62, O40 3 1 Introduction "The latest research [by Reinhart and Rogoff] suggests that once debt reaches more than about 90% of GDP the risks of a large negative impact on long term growth become highly significant."George Osborne, Mais Lecture, February 24, 2010 "The study [Reinhart and Rogoff (2010b)] found conclusive empirical evidence that total debt exceeding 90 percent of the economy has a significant negative effect on economic growth."'The Path to Prosperity,' House Committee on the Budget, April 5, 2011 Despite the rhetoric adopted by a number of governments and opposition parties over recent years, determining a causal link from public debt to long-run growth as well as the potential nonlinearity of this relationship are widely regarded as unresolved empirical issues (IMF, 2012;Panizza and Presbitero, 2014). As above quotes indicate the most influential research on the debt-growth nexus in recent years is unarguably the work by Reinhart and Rogoff (2010b) which has been adopted as justification for fiscal austerity measures by politicians on both sides of the Atlantic. Although recent revelations challenged the descriptive analysis carried out in their paper, Reinhart and Rogoff 4 maintain that "the weight of the evidence to date -including this latest comment [by Herndon, Ash and Pollin, 2014] -seems entirely consistent with our original interpretation of the data" (Wall Street Journal 'Real Time Economics' blog, April 16, 2013), namely that "high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes" (Reinhart and Rogoff, 2010b: 577; see also Rogoff, 2013). Perhaps aware of the tension between the causal interpretation typically read into this type of statement and ...

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Section: Methodsmentioning

confidence: 99%

Nonlinearities in the Relationship Between Debt and Growth: (No) Evidence From Over Two Centuries

Eberhardt

2017

Macroecon. Dynam.

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“…Asymptotic properties of FM-OLS estimates are determined by the joint error process of ( ) y and the serial correlation in 1t u in Equation (1). This treatment of the serial correlation in 1t u , like that in the study by de Jong [13] and Gonzalo and Pitarakis [7], a more general assumption in threshold cointegration regression. Assumption 2 provides some moment conditions imposed on { } 1t u and { } 2t u .…”

Section: Assumptions and Parameter Estimationmentioning

confidence: 99%

Note on Fully Modified Estimation for Three-Regime Threshold Cointegration Model

Wang¹

2014

TEL

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In this paper we consider a three-regime threshold cointegration model. The fully modified ordinary least squares (FM-OLS) regression of Phillips and Hansen [1] is used to develop new methods for estimating cointegrating coefficients. After we remove the second-order biases of parameter estimates from the three-regime threshold cointegration model, FM-OLS estimates have a limit distribution that is mixed normal for all the nonstationary coefficients.

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“…There has been an attempt in the literature to generalise this model along various directions: to incorporate heteroscedasticity into the errors (Hansen [13] and Cavaliere et al [4]) and nonlinearities into the fit (Gonzalo et al [11], Kristensen and Rabhek [21] and Saikonnen [29]). Ripatti and Saikonenn [25] and Johansen and Mosconi [17] have sought to incorporate permanent changes into the deterministic terms.…”

Section: Econometric Methodologymentioning

confidence: 99%

Evaluating the existence of structural change in the Brazilian term structure of interest rate: evidence based on Hansens cointegration models with structural break

Marçal

Pereira

2014

São Paulo J. Math. Sci.

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Abstract. This paper investigates whether there is evidence of structural change in the Brazilian term structure of interest rates. Multivariate cointegration techniques are used to verify this evidence. An econometric model is estimated which is a Vector Autoregressive Model with Error Correction Mechanism (VECM) with abrupt structural change formulated by Hansen [13]. Two datasets were analysed. The first one contains a nominal interest rate with maturity up to three years. The second data set focuses on maturity up to one year. The first data set focuses on a sample period from 1995 to 2010 and the second from 1998 to 2010. The frequency is monthly. The estimated models suggest the existence of structural change in the Brazilian term structure. It was possible to document the existence of multiple regimes using the technique for both databases. The risk premium for different spreads varied considerably during the earliest period of both samples and seemed to converge to stable and lower values at the end of the sample period. Long-term risk premiums seemed to converge to international standards, although the Brazilian term structure is still subject to liquidity problems for longer maturities.JEL Code: G10, E43, C58

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Threshold Effects in Cointegrating Relationships*

Cited by 88 publications

References 37 publications

Nonlinearities in the Relationship Between Debt and Growth: (No) Evidence From Over Two Centuries

Nonlinearities in the Relationship Between Debt and Growth: (No) Evidence From Over Two Centuries

Note on Fully Modified Estimation for Three-Regime Threshold Cointegration Model

Evaluating the existence of structural change in the Brazilian term structure of interest rate: evidence based on Hansens cointegration models with structural break

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