A simple approach to robust inference in a cointegrating system
AbstractCointegration requires all the variables in the system to have exact unit roots; accordingly it is conventional for researchers to test for a unit root in each variable prior to a cointegration analysis. Unfortunately, these unit root tests are not powerful. Meanwhile, conventional cointegration methods are not at all robust to slight violations of the requirement that each variable have a unit root. In this paper I show how this difficulty may be circumvented by instrumenting the regressors in the cointegrating regression by deterministic polynomial time trends or by artificially generated random walks.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 654.
Date of creation: 1999
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-04-17 (All new papers)
- NEP-ECM-2000-04-17 (Econometrics)
- NEP-ETS-2000-04-17 (Econometric Time Series)
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