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Spurious Long-Horizon Regression in Econometrics

Author

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  • Antonio E. Noriega
  • Daniel Ventosa-Santaulària

Abstract

This paper extends recent research on the behaviour of the t-statistic in a long-horizon regression (LHR). We assume that the explanatory and dependent variables are generated according to the following models: a linear trend stationary process, a broken trend stationary process, a unit root process, and a process with a double unit root. We show that, both asymptotically and in finite samples, the presence of spurious LHR depends on the assumed model for the variables. We propose an asymptotically correct inferential procedure for testing the null hypothesis of no relationship in a LHR, which works whether the variables have a long-run relationship or not. Our theoretical results are applied to an international data set on money and output in order to test for long-run monetary neutrality. Under our new approach and using bootstrap methods, we find that neutrality holds for all countries.

Suggested Citation

  • Antonio E. Noriega & Daniel Ventosa-Santaulària, 2010. "Spurious Long-Horizon Regression in Econometrics," Working Papers 2010-06, Banco de México.
  • Handle: RePEc:bdm:wpaper:2010-06
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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B946C1861-A39E-AA85-6637-5DDF94A5E50B%7D.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Long-horizon regression; asymptotic theory; deterministic and stochastic trends; unit roots; structural breaks; long-run monetary neutrality.;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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