THRESHOLD COINTEGRATION

In this paper, we consider a model in which there is discontinuous adj ustment to a long-run equilibrium. Here, the equilibrium error follows a threshold autoregression that is mean-reverting outside a given ran ge and has a unit root inside the range. We suggest a two-step approac h for examining threshold cointegration. We find that standard time se ries methods developed for testing for cointegration in the linear cas e work reasonably well when threshold cointegration is present. We the n consider a 'sup-Wald' test of linearity that takes the double-thresh old model as the alternative hypothesis.