Abstract
This paper proposes a transformed linear cointegration model of the form Λ(yt,β0)=xt⊤θ10+zt⊤θ20+ut, where Λ is a monotonic function, xt is the nonstationary vector regressor, zt is the stationary regressor, ut is the regression error, and β0,θ10,θ20 are unknown parameters. This model offers a flexible nonlinear cointegration via the monotonic transformation of the dependent variable, and includes the conventional linear cointegration model as a special case. Asymptotic properties of the proposed estimators are established. Simulations demonstrate that the estimators perform well in small samples. A real data example on the purchasing power parity illustrates the practical merits of our model.
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