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Detecting long memory co-movements in macroeconomic time series

Listed author(s):
  • Gianluca Moretti


    (Banca d'Italia, Research Department)

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    Cointegration analysis tests for the existence of a significant long-run equilibrium among some economic variables. Standard econometric procedures to test for cointegration have proven unreliable when the long-run relation among the variables is characterized by non-linearities and persistent fluctuations around the equilibrium. As a consequence, many intuitive economic relations are empirically rejected. In this paper we propose a simple approach to account for non-linearities in the cointegrating equilibrium and possible long memory fluctuations from such equilibrium. We show that our correction allows us to test robustly for the presence of cointegration both under the null and alternative hypotheses. We apply our procedure to the Johansen-Juselius PPP-UIP database, and unlike the standard case, we do not fail to reject the null of no cointegration.

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    Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 642.

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    Date of creation: Sep 2007
    Handle: RePEc:bdi:wptemi:td_642_07
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    1. Luis A. Gil-Alana, 2003. "Testing of Fractional Cointegration in Macroeconomic Time Series," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(4), pages 517-529, September.
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