Structural Change in the Deterministic and Stochastic Part of VECM. I(1) and I(2) Case

Abstract

The paper analyses the consequences of structural change in the presence
of non-stationary stochastic processes I(1) or I(2). The structural change may
concern the deterministic structure (in particular, the trend and the constant
term) as well as the process generating the stochastic part. The focus of the
paper is on the case of a discrete change in a regime for which the moment
of switch is known. A change in the deterministic part does not alter the
character of the cointegration relationships but its consequences for cotrending
and cobreaking are interesting. The consequences of a change in the stochastic
part are more complex, because then the stochastic process as well as the
deterministic structure of the VECM are modified. The restrictions are analysed
for both cases.