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Estimating Cointegrating Relationships When There Is Uncertainty About The Time Series Properties of

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  • Dr Garry Young

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Abstract

A limitation of the current practice of pre-testing for unit roots before modelling cointegration is that unit root tests have low power in finite samples. As a result, series may be misclassified and estimation and inference dramatically affected. Phillips (1995) proposes a method based on the principle of fully modified least squares that can be used for estimation and inference whether the series are stationary, nonstationary or a mixture of both. Sheldon (1997) also proposes an IV method that deals with the case where the size of the root in the regressor is not known a priori. In an application to UK consumers' expenditure we show how the appropriate estimator may be chosen in the light of the available information.

Suggested Citation

  • Dr Garry Young, 1998. "Estimating Cointegrating Relationships When There Is Uncertainty About The Time Series Properties of," National Institute of Economic and Social Research (NIESR) Discussion Papers 135, National Institute of Economic and Social Research.
  • Handle: RePEc:nsr:niesrd:207
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