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Bootstrap inference in single equation error correction models

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  • Herwartz, Helmut
  • Neumann, Michael H.
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    Abstract

    In the sequel of its seminal application in Davidson, Hendry, Srba and Yeo (1978) the single equation error correction model has been widely used in empirical practice. Providing a clear distinction between short- and long-run dynamics this model allows OLS-methods to be as efficient as (multivariate) full information maximum likelihood methods under a few assumptions on weak exogeneity and cointegration. We consider OLS-based tests on long-run relationships, weak exogeneity and short-run dynamics. For the latter issues it is known that common test-statistics are no longer pivotal if model errors exhibit conditional heteroskedasticity. We show that the wild bootstrap provides convenient critical values for the considered OLS-based statistics under both homoskedastic and conditionally heteroskedastic model errors. The wild bootstrap is easy to implement and turns out to improve considerably the empirical size of common test statistics compared to first order asymptotic approximations. We prove further that the wild bootstrap retains its validity for inference within a system of pooled equations exhibiting cross sectional correlation. Opposite to feasible GLS methods our approach does not require any parametric specification of cross sectional correlation, and copes with time varying patterns of contemporaneous error correlation. --

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    Bibliographic Info

    Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2000,87.

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    Date of creation: 2000
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    Handle: RePEc:zbw:sfb373:200087

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    Related research

    Keywords: Error correction models; panel cointegration analysis; bootstrap;

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    Cited by:
    1. Helmut Herwartz & Bernd Theilen, 2003. "The determinants of health care expenditure: testing pooling restrictions in small samples," Health Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 113-124.
    2. Helmut Herwartz & Hans-Eggert Reimers, 2006. "Long-Run Links among Money, Prices and Output: Worldwide Evidence," German Economic Review, Verein für Socialpolitik, vol. 7, pages 65-86, 02.
    3. Herwartz, Helmut & Reimers, Hans-Eggert, 2002. "Testing the purchasing power parity in pooled systems of error correction models," Japan and the World Economy, Elsevier, vol. 14(1), pages 45-62, January.

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