One of the most important features of estimating a production function is the
presence of an I(2) capital stock series. Given the empirical regularity that the first
difference of capital stock -i.e. investment- is an I(1) series, capital stock tends to
have a double unit root. Using Ethiopian data from 1960/61 to 2001/02, we showed
that the existence of cointegrating relationship is rejected under the I(1) analysis
while the I(2) analysis fail to reject the existence of cointegrating relationship. This
indicates the possibility of polynomial cointegration. We also argued that the
polynomial cointegration can be motivated theoretical apart from being an empirical
issue alone.
