IDEAS home Printed from https://ideas.repec.org/p/ukc/ukcedp/1323.html
   My bibliography  Save this paper

Symmetry and Separability in Two-Country Cointegrated VAR Models: Representation and Testing

Author

Listed:
  • Hans-Martin Krolzig

    ()

  • Reinhold Heinlein

    ()

Abstract

Introducing the approach by Masanao Aoki (1981) to time series econometrics, we show that the dynamics of symmetric linear possibly cointegrated two-country VAR models can be separated into two autonomous subsystems: the country averages and country differences, where the latter includes the exchange rate. The symmetric two-country cointegrated VAR model is synchronized, ie the two countries are driven by the same common trends, if and only if the country-differences subsystem is stable. It is shown that separability carries over even under mild asymmetries such as difference in the size of the countries' economies. The possibilities of a recursive structural VECM representation under symmetry is evaluated. The derived conditions for symmetry and separability are easily testable and applied to nine-dimensional quarterly cointegrated VAR models for five different country pairs in the post-Bretton-Woods era. We find evidence for the symmetry of the cointegration space, which is of practical importance as it allows for the identification of the cointegration vectors in much smaller systems, and for the exchange rate equation in general.

Suggested Citation

  • Hans-Martin Krolzig & Reinhold Heinlein, 2013. "Symmetry and Separability in Two-Country Cointegrated VAR Models: Representation and Testing," Studies in Economics 1323, School of Economics, University of Kent.
  • Handle: RePEc:ukc:ukcedp:1323
    as

    Download full text from publisher

    File URL: ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/1323.pdf
    Download Restriction: no

    More about this item

    Keywords

    Multi-country modelling; Cointegration; Common trends; Structural VAR; Synchronization; Exchange rate; International Economics;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ukc:ukcedp:1323. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tracey Girling). General contact details of provider: http://www.kent.ac.uk/economics/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.