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On the Identification of Cointegrated Systems in Small Samples: Practical Procedures with an Application to UK Wages and Prices

Author

Listed:
  • Stephen G. Hall

    () (Imperial College Management School)

  • Jennifer V. Greenslade

    (Bank of England)

  • S. G. Brian Henry

    () (London Business School)

Abstract

This paper discusses the practical application of identification in cointegrated systems. It will argue that in a common realistic modelling situation of a limited data set and the theory requirements of a fairly rich model, the techniques proposed in the existing literature are almost impossible to implement successfully. There are crucial decisions to be made over the order in which various restrictions are imposed in the move from a general unrestricted VECM to the fully (over) identified VECM. We will argue that imposing exogeneity restrictions at the earliest possible stage of the model reduction process and then restricting the dynamic adjustment of the model hugely increases the power of tests of overidentifying restrictions on the long run cointegrating vectors. These arguments are supported by Monte Carlo evidence. In practise this means that a thorough use of economic theory at an early stage, rather than treating a model as a pure statistical artifact, can yield enormous benefits.

Suggested Citation

  • Stephen G. Hall & Jennifer V. Greenslade & S. G. Brian Henry, 1999. "On the Identification of Cointegrated Systems in Small Samples: Practical Procedures with an Application to UK Wages and Prices," Computing in Economics and Finance 1999 643, Society for Computational Economics.
    • Handle: RePEc:sce:scecf9:643
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    Cited by:

    1. Welfe, Aleksander, 2000. "Modeling inflation in Poland," Economic Modelling, Elsevier, vol. 17(3), pages 375-385, August.
    2. repec:sbe:breart:v:25:y:2005:i:2:a:2503 is not listed on IDEAS
    3. Aleksander Welfe & Piotr Keblowski, 2006. "Price-Wage System with Taxation: Multivariate Cointegration Analysis," Working Papers 13, Department of Applied Econometrics, Warsaw School of Economics.
    4. Rault, Christophe, 2005. "Further Results on Weak Exogeneity in Vector Error Correction Models," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 25(2), November.
    5. Keblowski, Piotr & Welfe, Aleksander, 2010. "Estimation of the equilibrium exchange rate: The CHEER approach," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1385-1397, November.
    6. Ulph, A. & Valentini, L., 1998. "Is environmental dumping greater when firms are footloose?," Discussion Paper Series In Economics And Econometrics 9819, Economics Division, School of Social Sciences, University of Southampton.
    7. de Wet, Albertus H. & van Eyden, Reneé & Gupta, Rangan, 2009. "Linking global economic dynamics to a South African-specific credit risk correlation model," Economic Modelling, Elsevier, vol. 26(5), pages 1000-1011, September.
    8. Imke Brüggemann, 2003. "Measuring Monetary Policy in Germany: A Structural Vector Error Correction Approach," German Economic Review, Verein für Socialpolitik, vol. 4, pages 307-339, August.
    9. repec:sgh:gosnar:y:2017:i:4:p:5-38 is not listed on IDEAS
    10. Mukerji, S., 1995. "A theory of play for games in strategic form when rationality is not common knowledge," Discussion Paper Series In Economics And Econometrics 9519, Economics Division, School of Social Sciences, University of Southampton.
    11. Katarzyna Budnik, 2008. "Non-accelerating wage inflation rate of unemployment in Poland," NBP Working Papers 48, Narodowy Bank Polski, Economic Research Department.
    12. Mourmouras, Iannis A. & Ghosh, Sugata, 2000. "Fiscal Policies and the Terms of Trade in an Endogenous Growth Model with Overlapping Generations," Journal of Macroeconomics, Elsevier, vol. 22(3), pages 445-470, July.
    13. Cook, S., 1996. "Econometric methodology II: the role of the philosophy of science," Discussion Paper Series In Economics And Econometrics 9619, Economics Division, School of Social Sciences, University of Southampton.
    14. Hall, Stephen & Nixon, James, 2000. "Unemployment and the capital stock: a dynamic structural model of the UK supply side," Economic Modelling, Elsevier, vol. 17(3), pages 415-437, August.
    15. Rayner, J., 1992. "Identification of structural VARs," Discussion Paper Series In Economics And Econometrics 9219, Economics Division, School of Social Sciences, University of Southampton.
    16. Kaufmann, Robert K. & Dees, Stephane & Mann, Micheal, 2009. "Horizontal and vertical transmissions in the US oil supply chain," Energy Policy, Elsevier, vol. 37(2), pages 644-650, February.
    17. Antoine Parent & Christophe Rault, 2005. "The Influences Affecting French Assets Abroad Prior 1914," Documents de recherche 05-14, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    18. Hall, Stephen & Mizon, Grayham E. & Welfe, Aleksander, 2000. "Modelling economies in transition: an introduction," Economic Modelling, Elsevier, vol. 17(3), pages 339-357, August.
    19. Abbott, Andrew & De Vita, Glauco, 2002. "Testing the long-run structural validity of the monetary exchange rate model," Economics Letters, Elsevier, vol. 75(2), pages 157-164, April.
    20. José Antonio Gibanel Salazar, 2014. "Economic models: comparative analysis of their adjustment and prediction capacities," Contribuciones a la Economía, Grupo Eumed.net (Universidad de Málaga), issue 2014-05, November.
    21. Katarzyna Leszkiewicz-Kędzior, 2011. "Modelling Fuel Prices. An I(1) Analysis," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 3(2), pages 75-95, June.
    22. MacLeod, W.B. & Malcomson, J.M., 1993. "Motivation, markets and dual economies," Discussion Paper Series In Economics And Econometrics 9319, Economics Division, School of Social Sciences, University of Southampton.
    23. Colin Ellis & Simon Price, 2003. "The impact of price competitiveness on UK producer price behaviour," Bank of England working papers 178, Bank of England.
    24. Qizilbash, M., 1994. "Corruption, temptation and guilt: moral character in economic theory," Discussion Paper Series In Economics And Econometrics 9419, Economics Division, School of Social Sciences, University of Southampton.

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