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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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  1. Boswijk, H. Peter, 1995. "Efficient inference on cointegration parameters in structural error correction models," Journal of Econometrics, Elsevier, vol. 69(1), pages 133-158, September.
  2. Pesaran, M.H. & Shin, Y., 1993. "Cointegration and Speed of Convergence to Equilibrium," Cambridge Working Papers in Economics 9311, Faculty of Economics, University of Cambridge.
  3. Phillips, P C B & Durlauf, S N, 1986. "Multiple Time Series Regression with Integrated Processes," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 473-95, August.
  4. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  5. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  6. Phillips, P C B, 1991. "Optimal Inference in Cointegrated Systems," Econometrica, Econometric Society, vol. 59(2), pages 283-306, March.
  7. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  8. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
  9. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  10. Anders Rahbek & Rocco Mosconi, 1999. "Cointegration rank inference with stationary regressors in VAR models," Econometrics Journal, Royal Economic Society, vol. 2(1), pages 76-91.
  11. Karim M. Abadir & Kaddour Hadri & Elias Tzavalis, 1999. "The Influence of VAR Dimensions on Estimator Biases," Econometrica, Econometric Society, vol. 67(1), pages 163-182, January.
  12. Harbo, Ingrid, et al, 1998. "Asymptotic Inference on Cointegrating Rank in Partial Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 388-99, October.
  13. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
  14. Park, Joon Y. & Phillips, Peter C.B., 1989. "Statistical Inference in Regressions with Integrated Processes: Part 2," Econometric Theory, Cambridge University Press, vol. 5(01), pages 95-131, April.
  15. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  16. Yamada, Hiroshi & Toda, Hiro Y., 1998. "Inference in possibly integrated vector autoregressive models: some finite sample evidence," Journal of Econometrics, Elsevier, vol. 86(1), pages 55-95, June.
  17. Park, Joon Y, 1992. "Canonical Cointegrating Regressions," Econometrica, Econometric Society, vol. 60(1), pages 119-43, January.
  18. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
  19. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  20. Clive, W.J. & Lin, Jin-Lung, 1995. "Causality in the Long Run," Econometric Theory, Cambridge University Press, vol. 11(03), pages 530-536, June.
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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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