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Explaining stationary variables with non-stationary regressors

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  • John Baffes

Abstract

When variables included in an OLS regression are stationary, conventional statistical measures such as t-statistics and R2's - in addition to a priori information from economic theory - are the standard indicators used to assess the performance of the hypothesized model. However, if the variables under consideration are non-stationary, such conventional measures no longer have the usual interpretation. With recent developments in time-series analysis, namely cointegration, researchers are able to deal with models containing non-stationary variables effectively. A standard cointegration model, however, requires all variables included in the regression to be of the same order of integration. In this paper we consider a regression in which the dependent variable is integrated of order zero, I(0), while the explanatory variables are integrated of order one, I(1). Conventional statistical measures are inapplicable because the regressors are not stationary. On the other hand, cointegration statistics are inapplicable because the variables are not of the same order of integration. This letter proposes a methodology on how to evaluate the performance of such a model.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 4 (1997)
Issue (Month): 1 ()
Pages: 69-75

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Handle: RePEc:taf:apeclt:v:4:y:1997:i:1:p:69-75

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Cited by:
  1. Piesse, Jenifer & Thirtle, Colin, 2009. "Three bubbles and a panic: An explanatory review of recent food commodity price events," Food Policy, Elsevier, vol. 34(2), pages 119-129, April.
  2. Nora Lustig, 2009. "Coping with Rising Food Prices: Policy Dilemmas in the Developing World," Working Papers 2009-04, The George Washington University, Institute for International Economic Policy.
  3. Mitchell, Donald, 2008. "A note on rising food prices," Policy Research Working Paper Series 4682, The World Bank.
  4. Fedoseeva, Svetlana, 2013. "Do German exporters PTM? Searching for right answers in sugar confectionery exports," Discussion Papers 62, Justus Liebig University Giessen, Center for international Development and Environmental Research (ZEU).
  5. Kopsch, Fredrik, 2012. "A demand model for domestic air travel in Sweden," Journal of Air Transport Management, Elsevier, vol. 20(C), pages 46-48.
  6. Baffes, John, 2007. "Oil spills on other commodities," Resources Policy, Elsevier, vol. 32(3), pages 126-134, September.
  7. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2013. "The impact of excess reserves beyond precautionary levels on Bank Lending Channels in China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 358-377.
  8. Baffes, John & Dennis, Allen, 2013. "Long-term drivers of food prices," Policy Research Working Paper Series 6455, The World Bank.
  9. Mela, Giulio, 2012. "Did the Fischler reform increase market integration between the EU and world commodity markets?," Congress Papers 124107, Italian Association of Agricultural and Applied Economics (AIEAA).
  10. Krieger, Kevin & Lee, Bong-Soo & Mauck, Nathan, 2012. "Do Senior Citizens Prefer Dividends? Local Clienteles vs. Firm Characteristics," MPRA Paper 41784, University Library of Munich, Germany.
  11. Baffes, John, 2009. "More on the energy / non-energy commodity price link," Policy Research Working Paper Series 4982, The World Bank.
  12. Watson, John & Wickramanayake, J., 2012. "The relationship between aggregate managed fund flows and share market returns in Australia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 451-472.

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