Line Elvstrøm Ekner: Cointegration and Regime Switching Dynamics in Macroeconomic Applications

This dissertation consists of three chapters, each of which can be read separately. In chapter 1, I study regime switching behavior in the macroeconomic relationship between output and the unemployment rate called Okun's law. The relationship is estimated for the U.S. by fitting a smooth transition vector error correction model with Okun’s law relationship defined as a linear cointegration relationship with non-linear short-run dynamics. Several estimation and specification issues are discussed. The two regimes of the model have asymmetric dynamics and can be classified as a recession regime and an expansion regime. Okun's coefficient is estimated to -0.28 and thereby close to the -1/3 rule of thumb benchmark originally suggested by Arthur Okun in 1962. In chapter 2 (joint with Emil Nejstgaard), we propose a reparametrization of the logistic smooth transition autoregressive (LSTAR) model which facilitates identification and estimation of the so-called speed of transition parameter. We show that all derivatives of the likelihood function are approaching zero as the parameter measuring the speed of transition increases, and, hence, the threshold autoregressive model always represents at least a local maximum of the LSTAR likelihood function. We propose to use information criteria for the choice between the two models and show the effectiveness of this procedure by means of simulations. Two empirical applications illustrate the usefulness of our findings. Finally, chapter 3 contributes to the literature on the convenience yield on U.S. Treasury bonds caused by a demand for the extreme liquidity and safety offered by these bonds. Consequently, the convenience yield, as measured by the spread between yields on high grade corporate bonds and Treasury bonds, depends on the supply of Treasury bonds. The dynamics of the persistent variables measuring Treasury supply and convenience yield are modeled in a vector error correction model (VECM). The long-run relationship is negative reflecting a downward-sloping demand function for liquidity and safety. However, the short-run relationship is positive and identified by means of a structural VECM. The driving factor of the short-run result is the safety premium of the convenience yield. The results are robust to a potential kink in the demand relation estimated by a threshold VECM.