d. The long-run parameter estimates of the VECM, , has the following form:

1.000000 0.000000 0.000000 0.000000 0.000000

0.000000 1.000000 0.000000 0.000000 0.000000

0.000000 0.000000 1.000000 0.000000 0.000000

=

0.000000 0.000000 0.000000 1.000000 0.000000

0.000000 0.000000 0.000000 0.000000 1.000000

-0.984151 -1.032363 -0.978260 -1.104874 -1.075952

(0.15466) (0.01984) (0.00836) (0.08520) (0.12167)

[-6.36344] [-52.0387] [-117.004] [-12.9675] [-8.84352]

Interpret the parameters and explain how these estimates are related to the expectations

theory.

[4 marks]

e. Do you agree that a VECM allows to capture the short-run dynamics between the interest

rates? Explain your answer.

[4 marks]

f. If a VECM with the different interest rates would have a zero rank, what model should

we use?