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Codependence in Cointegrated Autoregressive Models

  • Christoph Schleicher

This paper investigates codependent cycles, i.e. transitory components that react to common stimuli in a similar, although not necessarily synchronous fashion. In a multivariate system, codependence corresponds to an impulse response function that is collinear except for a small number of initial periods. It is shown that the number of cofeature combinations that yield the scalar component models associated with codependence is severely limited by the dimension of a finite-order VAR system. The presence of cointegrating relationships imposes additional cross-equation restrictions and further limits the number of permissible cofeatures. For vector-error correction models, the distribution of FIML based LR tests is therefore different than that of the limited information tests proposed by Vahid and Engle (1997). Monte-Carlo simulations indicate that LR tests yield an increase in power relative to the alternative GMM and canonical correlations tests, while maintaining good size properties. An empirical application investigates the presence of codependence among individual components of the U.S. economy. It is found that the (Beveridge-Nelson) cycle under codepence assumptions contains significantly less high-frequency information than the unconstrained cycle.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 286.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:286
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  1. Francisco Barillas & Christoph Schleicher, 2003. "Common Trends and Common Cycles in Canadian Sectoral Output," Working Papers 03-44, Bank of Canada.
  2. Robert F. Engle & Sharon Kozicki, 1990. "Testing For Common Features," NBER Technical Working Papers 0091, National Bureau of Economic Research, Inc.
  3. Stock, James H & Watson, Mark W, 1988. "Variable Trends in Economic Time Series," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 147-74, Summer.
  4. Vahid, F & Engle, Robert F, 1993. "Common Trends and Common Cycles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(4), pages 341-60, Oct.-Dec..
  5. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(4), pages 393-95, October.
  6. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  7. Proietti, Tommaso, 1997. "Short-Run Dynamics in Cointegrated Systems," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(3), pages 405-22, August.
  8. Cubadda, Gianluca & Hecq, Alain, 2001. "On non-contemporaneous short-run co-movements," Economics Letters, Elsevier, vol. 73(3), pages 389-397, December.
  9. Hecq, Alain & Palm, Franz C & Urbain, Jean-Pierre, 2000. " Permanent-Transitory Decomposition in VAR Models with Cointegration and Common Cycles," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(4), pages 511-32, September.
  10. Peter KUGLER & Klaus NEUSSER, 1990. "International Real Interest Rate Equalization: A Multivariate Time Series Approach," Vienna Economics Papers vie9003, University of Vienna, Department of Economics.
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