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Explaining stationary variables with non-stationary regressors


  • John Baffes


When variables included in an OLS regression are stationary, conventional statistical measures such as t-statistics and R2's - in addition to a priori information from economic theory - are the standard indicators used to assess the performance of the hypothesized model. However, if the variables under consideration are non-stationary, such conventional measures no longer have the usual interpretation. With recent developments in time-series analysis, namely cointegration, researchers are able to deal with models containing non-stationary variables effectively. A standard cointegration model, however, requires all variables included in the regression to be of the same order of integration. In this paper we consider a regression in which the dependent variable is integrated of order zero, I(0), while the explanatory variables are integrated of order one, I(1). Conventional statistical measures are inapplicable because the regressors are not stationary. On the other hand, cointegration statistics are inapplicable because the variables are not of the same order of integration. This letter proposes a methodology on how to evaluate the performance of such a model.

Suggested Citation

  • John Baffes, 1997. "Explaining stationary variables with non-stationary regressors," Applied Economics Letters, Taylor & Francis Journals, vol. 4(1), pages 69-75.
  • Handle: RePEc:taf:apeclt:v:4:y:1997:i:1:p:69-75 DOI: 10.1080/758521836

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    References listed on IDEAS

    1. Baillie, Richard T & Bollerslev, Tim, 1989. " Common Stochastic Trends in a System of Exchange Rates," Journal of Finance, American Finance Association, vol. 44(1), pages 167-181, March.
    2. Baillie, Richard T & Bollerslev, Tim, 1994. " Cointegration, Fractional Cointegration, and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 49(2), pages 737-745, June.
    3. Diebold, Francis X & Gardeazabal, Javier & Yilmaz, Kamil, 1994. " On Cointegration and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 49(2), pages 727-735, June.
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    6. Mela, Giulio, 2012. "Did the Fischler reform increase market integration between the EU and world commodity markets?," Congress Papers 124107, Italian Association of Agricultural and Applied Economics (AIEAA).
    7. Baffes, John, 2009. "More on the energy / non-energy commodity price link," Policy Research Working Paper Series 4982, The World Bank.
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    13. Nora Lustig, 2009. "Coping with Rising Food Prices: Policy Dilemmas in the Developing World," Working Papers id:2241, eSocialSciences.
    14. Gutierrez, Luciano & Piras, Francesco, 2014. "A global VAR model for the analysis of wheat export prices," 2014 International Congress, August 26-29, 2014, Ljubljana, Slovenia 182723, European Association of Agricultural Economists.
    15. Piesse, Jenifer & Thirtle, Colin, 2009. "Three bubbles and a panic: An explanatory review of recent food commodity price events," Food Policy, Elsevier, vol. 34(2), pages 119-129, April.
    16. Crompton, Paul, 2015. "Explaining variation in steel consumption in the OECD," Resources Policy, Elsevier, vol. 45(C), pages 239-246.
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    18. Fedoseeva, Svetlana, 2013. "Do German exporters PTM? Searching for right answers in sugar confectionery exports," Discussion Papers 62, Justus Liebig University Giessen, Center for international Development and Environmental Research (ZEU).
    19. Greffion, Jérôme & Breda, Thomas, 2015. "Façonner la prescription, influencer les médecins," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 17.
    20. Mitchell, Donald, 2008. "A note on rising food prices," Policy Research Working Paper Series 4682, The World Bank.
    21. Kopsch, Fredrik, 2012. "A demand model for domestic air travel in Sweden," Journal of Air Transport Management, Elsevier, vol. 20(C), pages 46-48.
    22. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2013. "The impact of excess reserves beyond precautionary levels on Bank Lending Channels in China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 358-377.
    23. Boschen, John F. & Smith, Kimberly J., 2016. "The uncovered interest rate parity anomaly and trading activity by non-dealer financial firms," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 333-342.

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