Econometric Theory

ARTICLES

ANALYSIS OF COEXPLOSIVE PROCESSES

Bent Nielsena1 c1

a1 University of Oxford

Abstract

A vector autoregressive model allowing for unit roots as well as an explosive characteristic root is developed. The Granger-Johansen representation shows that this results in processes with two common features: a random walk and an explosively growing process. Cointegrating and coexplosive vectors can be found that eliminate these common factors. The likelihood ratio test for a simple hypothesis on the coexplosive vectors is analyzed. The method is illustrated using data from the extreme Yugoslavian hyperinflation of the 1990s.

Correspondence

c1 Address correspondence to Bent Nielsen, Nuffield College, Oxford OX1 1NF, UK; e-mail: bent.nielsen@nuffield.ox.ac.uk.

Footnotes

I am grateful to Søren Johansen, who read an earlier version of this paper very carefully and presented it at the Conference on Common Features in Rio de Janeiro in July 2002. I have also benefited from discussions with Martin Wagner and insightful comments from the referees. Computations were done using PcGive (Doornik and Hendry, 2001). Financial support from ESRC grant RES-000-27-0179 is gratefully acknowledged.

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