Trend stationarity in the I(2) cointegration model

A vector autoregressive model for 1(2) processes which allows for trend-sta tionary components and restricts the deterministic part of the process to b e at most linear is defined. A two-step statistical analysis of the model i s derived. The joint test of 1(1) and 1(2) cointegrating ranks is shown to be asymptotically similar with respect to the drift terms and the asymptoti c distribution is tabulated. The cointegrating parameters are shown to be m ixed Gaussian and an application for UK monetary data illustrates the propo sed analysis. (C) 1999 Elsevier Science S.A. All rights reserved. JEL class ification. C32; C51; C52.