Detection of switching cointegration rank allowing for switching lag structure: an application to money-demand function

A new method is developed for detecting regime switches between cointegration and no-cointegration at unknown times allowing for switching lag structure. In this method, time-series observations are divided into several segments, and a regression model with or without cointegration is fitted to each segment. The goodness of fit of the global model composed of these local models is evaluated using the corresponding modified information criterion, and the division which minimizes this criterion defines the best model. Simulation results suggest that the proposed method works well. Empirical results indicate that money demand is well described by the proposed method in Canada, UK and Japan.