Instability in Cointegration Regressions : Further Discussion with an Application to Money Demand in Portugal

This study addresses some modeling questions related to the possibility of structural change in models with non-stationary variables. Focusing on cointegration issues, some methodological aspects ere discussed, attempting to integrate coherently the several steps of the modelling strategy. These range from unit to cointegration testing and to testing for instability in the cointegration vector. An empirical example with Portuguse data tries to illustrate the usefulness of this approach, where a simple money demand function is estimated using an error-correction model (ECM). If a break is explicitly allowed in the cointegration vector the forecasting ferformance of the ECM improves