Common trends and cycles in I(2) VAR systems

This paper analyzes common cycles in I(2) vector autoregressive (VAR) systems. We
consider different choices of stationary variables extracted from a VAR, including deviations
from equilibria. This extension is based on the equilibrium dynamics representation of the
system, introduced in this paper. Inference on the number of common features is addressed via
reduced rank regression, as well as estimation of the cofeature relations and testing. An
application to Australian prices is presented; it is found that the deviation from one
equilibrium relation is an innovation process, whereas no common cycles can be obtained for
the acceleration rates.