Threshold cointegration: overview and implementation in R

Abstract

Purpose of this paper is twofold. It is first to offer a rough overview on the field of threshold cointegration, from the seminal paper of Balke and Fomby (1997) to the recent developments. Simultaneously, it is to describe the implementation of the main functionalities for the modelling in the open-source package tsDyn. It provides hence a unique way to get an introduction on the threshold cointegration field allowing in the same time to conduct its own analysis. Introduced by Engle and Granger (1987), the concept of cointegration became a indisensable step in the analysis of non stationary time series. The underlying idea is that even if two variables (or more) are non-stationary, there can exist a combination of them which is stationary. The interpretation of this definition is richefull as it means that the variables have a stable relationship (a long-run equilibrium), can be represented in an vector error-correction model, and share a common stochasti