RESIDUAL-BASED TESTS FOR COINTEGRATION IN MODELS WITH REGIME SHIFTS

In this paper we examine tests for cointegration which allow for the p ossibility of regime shifts. We propose ADF-, Z(x)-, and Z(t)-type tes ts designed to test the null of no cointegration against the alternati ve of cointegration in the presence of a possible regime shift, In par ticular we consider cases where the intercept and/or slope coefficient s have a single break of unknown timing, A formal proof is provided fo r the limiting distributions of the various tests for the regime shift model (both a level and slope change), Critical values are calculated for the tests by simulation methods and a simple Monte Carlo experime nt is conducted to evaluate finite-sample performance, In the limited set of experiments, we find that the tests can detect cointegrating re lations when there is a break in the intercept and/or slope coefficien t, For these same experiments, the power of the conventional ADF test with no allowance for regime shifts falls sharply, As an illustration we test for structural breaks in the U.S. long-run money-demand equati on using annual and quarterly data.