Faculty of Economics and Business Administration Publications Database

Dickey-Fuller Cointegration Tests in the Presence of Regime Shifts at Known Time

Volume: 86
Number: 3
Pages: 263 - 276
ISSN-Print: 1863-8171
Year: 2002
Keywords: Step dummy; Break in parameters; Monte Carlo; German money demand

This paper examines the e®ect of regime shifts taking place at known time on the residual-based Dickey-Fuller cointegration test. First, a simple level shift accounted for by means of a step dummy is considered. Second, in addition to a level shift one of the slope parameters is allowed to change. Third, the inclusion of additional regressors only after the break occurred is studied. By means of extensive Monte Carlo experiments simple rules of thumb are established. They allow to control up to a precision that should be su±cient in practice the size of tests in the presence of regime shifts. Those new criteria build on conventional critical values tabulated in the literature. They are illustrated empirically with a money demand function for Germany.