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Detecting long memory co-movements in macroeconomic time series

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Author Info
Gianluca Moretti () (Banca d'Italia, Research Department)
Abstract

Cointegration analysis tests for the existence of a significant long-run equilibrium among some economic variables. Standard econometric procedures to test for cointegration have proven unreliable when the long-run relation among the variables is characterized by non-linearities and persistent fluctuations around the equilibrium. As a consequence, many intuitive economic relations are empirically rejected. In this paper we propose a simple approach to account for non-linearities in the cointegrating equilibrium and possible long memory fluctuations from such equilibrium. We show that our correction allows us to test robustly for the presence of cointegration both under the null and alternative hypotheses. We apply our procedure to the Johansen-Juselius PPP-UIP database, and unlike the standard case, we do not fail to reject the null of no cointegration.

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Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 642.

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Date of creation: Sep 2007
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Handle: RePEc:bdi:wptemi:td_642_07

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Related research
Keywords: Cointegration analysis; long memory;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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  22. Juan J. Dolado & Jesus Gonzalo & Laura Mayoral, 2002. "A Fractional Dickey-Fuller Test for Unit Roots," Econometrica, Econometric Society, vol. 70(5), pages 1963-2006, September. [Downloadable!] (restricted)
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