THE ASYMPTOTICS OF SINGLE-EQUATION COINTEGRATION REGRESSIONS WITH I(1) AND I(2) VARIABLES

This paper addresses single-equation regression models containing both I(1) and I(2) variables, possibly with maintained deterministic compo nents. We analyze conditions under which standard Gaussian inference c an be validly conducted and the existing literature on spurious regres sions for the I(1) case is extended to models with I(2) series. The an alysis helps in describing how the residual-based Dickey-Fuller class of tests for noncointegration is affected when both I(1) and I(2) vari ables may enter the system. New critical values for this case are prov ided. The paper is completed by an empirical application of money dema nd in the UK.