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Long-run Relations in a Well Defined Statistical Model for the Data Generating Process. Cointegration Analysis of the PPP and the UIP Relations


  • Katarina Juselius

    (Institute of Economics, University of Copenhagen)


The concept of a well defined statistical model for the data generating process is given an empirical formulation in the vector autoregressive model under assumption of cointegration in an analysis of prices, interest rates and exchange rates between Denmark and Germany. The long-run relations are estimated as stationary linear combinations between the non-stationary variables and the presence of deterministic components in the common stochastic trends is investigated. Structural hypothesis on the purchasing power parity and uncovered interest rate hypothesis are tested in a full information maximum likelihood framework. Empirical support for both of these fundamental relations are found. Comparative analysis of the long-run relations based on the single equation ecm-model as well as the Engle-Granger two-step procedure are performed. The full system versus the partial system analysis approach is discussed in terms of optimal inference on the long-run parameters. By testing hypotheses on the weight coefficients it is empirically demonstrated that the full five-dimensional system cannot be reduced without loosing some efficiency.

Suggested Citation

  • Katarina Juselius, 1990. "Long-run Relations in a Well Defined Statistical Model for the Data Generating Process. Cointegration Analysis of the PPP and the UIP Relations," Discussion Papers 90-11, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:9011

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    References listed on IDEAS

    1. Sen, Partha & Turnovsky, Stephen J., 1990. "Investment tax credit in an open economy," Journal of Public Economics, Elsevier, vol. 42(3), pages 277-299, August.
    2. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
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    4. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
    5. Mutti, John & Grubert, Harry, 1985. "The taxation of capital income in an open economy: the importance of resident-nonresident tax treatment," Journal of Public Economics, Elsevier, vol. 27(3), pages 291-309, August.
    6. Bovenberg, A.L., 1986. "Capital income taxation in growing open economies," Other publications TiSEM d92d32f6-df9f-418b-bbd3-d, Tilburg University, School of Economics and Management.
    7. Lawrence H. Goulder & John B. Shoven & John Whalley, 1983. "Domestic Tax Policy and the Foreign Sector: The Importance of Alternative Foreign Sector Formulations to Results from a General Equilibrium Tax Analysis Model," NBER Chapters,in: Behavioral Simulation Methods in Tax Policy Analysis, pages 333-368 National Bureau of Economic Research, Inc.
    8. Keuschnigg, Christian, 1994. "Dynamic tax incidence and intergenerationally neutral reform," European Economic Review, Elsevier, vol. 38(2), pages 343-366, February.
    9. Bovenberg, A. Lans, 1986. "Capital income taxation in growing open economies," Journal of Public Economics, Elsevier, vol. 31(3), pages 347-376, December.
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    Cited by:

    1. Uctum, Merih, 1999. "European integration and asymmetry in the EMS," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 769-798, October.
    2. Philip Chimobi Omoke, 2012. "Bank Credit and Aggregate Import Demand in Nigeria: A Cointegration Analysis," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 3(3), pages 28-37, June.
    3. Francisco Ledesma & Manuel Navarro & Jorge Perez & Simón Sosvilla, 1998. "Purchasing power parity and uncovered interest parity: The Spanish case," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 4(4), pages 335-348, November.
    4. repec:kap:iaecre:v:4:y:1998:i:4:p:335-348 is not listed on IDEAS
    5. Catherine Doz & Pierre Malgrange, 1992. "Modèles VAR et prévisions à court terme," Économie et Prévision, Programme National Persée, vol. 106(5), pages 109-122.

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