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Structural analysis of vector error correction models exogenous i(1) variables

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  • M Pesaran
  • R Smith
  • Yongcheol Shin

    ()

Abstract

This paper generalizes the existing cointegration analysis literature in two respects. Firstly, the problem of efficient estimation of vector error correction models containing exogenous (1) variables is examined. The asymptotic distributions of the (log- )likelihood ratio statistics for testing cointegrating rank are derived under different intercept and trend specifications and their respective critical values are tabulated. Tests for the presence of an intercept or linear trend in the cointegrating relations are also developed together with model misspecification tests. Secondly, efficient estimation of vector error correction models when the short-run dynamics may differ within and between equations is considered. A re-examination of the purchasing power parity and the uncovered interest rate parity hypotheses is conducted using U.K. data under the maintained assumption of exogenously given foreign and oil prices

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Bibliographic Info

Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 38.

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Length: 46
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:edn:esedps:38

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Related research

Keywords: Structural Vector Correction Error; Cointegration; Unit Roots; Likelihood Ratio Statistics; Critical Values; Seemingly Unrelated Regression; Monte Carlo Simulations; Purchasing Power Parity; Uncovered Interest Rate Parity.;

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References

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Cited by:
  1. Guglielmo Maria Caporale & Davide Ciferri & Alessandro Girardi, 2008. "Are the Baltic Countries Ready to Adopt the Euro? A Generalised Purchasing Power Parity Approach," CESifo Working Paper Series 2359, CESifo Group Munich.

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