Testing for an unstable root in conditional and structural error correction models

Abstract This paper proposes a class of Wald tests for the hypothesis of an unstable root in conditional error correction models. Both single-equation models and simultaneous equations models in structural form are considered. The asymptotic distribution of the test statistics under the null hypothesis is derived in terms of a vector Brownian motion process, and critical values are obtained via Monte Carlo simulation. In an empirical model of the demand for money and the rate of inflation in the UK, the tests reject the instability hypothesis.

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