Dear fellow gretl users,
I have two questions about deterministic trends in VEC models.
gretl offers the five traditional approaches to VEC modelling, either
omitting all deterministic terms or including constants and trends in
restricted and unrestricted combinations. I was wondering if there are
any good "rules of thumb" for when to choose which approach? The EViews
manual, for example, suggests choosing a model with constant +
restricted trend if some of the level variables appear to oscillate
around a linear trend, I believe (although my memory may serve me wrong
here).
Also, from the gretl manual I learned that the specification of a VEC
model with a constant and *restricted* trend looks like this (LaTeX
code):
$\Delta y_{t}=\mu_{0}+\mu_{1}t+\alpha\beta'y_{t-1}+
\sum_{i=1}^{p-1}\Gamma_{i}\Delta y_{t-i}+\epsilon_{t}$
where $\alpha'\perp\mu_{1}=0$
I was wondering how the restriction of alpha being orthogonal to mu is
achieved in practice?
Thanks in advance for your help!
Stefan