Abstract :
In this paper we propose a time-varying vector error correction model in which the
cointegrating relationship varies smoothly over time. The Johansen setup is a special
case of our model. A likelihood ratio test for time-invariant cointegration is defined
and its asymptotic chi-square distribution is derived. We apply our test to the purchasing
power parity hypothesis of international prices and nominal exchange rates,
and we find evidence of time-varying cointegration.
