Threshold autoregressive (TAR) &Momentum Threshold autoregressive (MTAR) models Specification

Abstract

This paper proposes a testing integration and threshold integration procedure of interest rate and inflation rate. It locates whether there have been a cointegrating relationship between them and recognizes the procedures of addressing structural break. The most important issue is the testing of the hypothesis that whether effect of inflation on interest rates depends on the movement of inflation declining or increasing. In this study we analyze the inflation and interest rate of Canada for their long term relationships by applying co integration technique of EG-Model. Further we test it for the structural break and threshold autoregressive (TAR) and Momentum Autoregressive (MTAR) integration and stationarity. We generate real interest rate and test it for the same. We come to an end that TAR best capture the adjustment process. We discover that our selected series are integrated at level one. There is cointegration relationship between interest rate and inflation with the cointegrating vector (1,-1).We find no asymmetry in our series and therefore conclude that there is same effect of inflation increase or decrease on interest rate.

Keywords: Threshold autoregressive, Momentum autoregressive, Co integration, Stationarity