Showing papers on "Cointegration published in 1990"

Cointegration and unit roots

Abstract: This paper provides an updated survey of a burgeoning literature on testing, estimation and model specification in the presence of integrated variables. Integrated variables are a specific class of non-stationary variables which seem to characterise faithfully the properties of many macroeconomic time series. The analysis of cointegration develops out of the existence of unit roots and offers a generic route to test the validity of the equilibrium predictions of economic theories. Special emphasis is put on the empirical researcher's point of view.

Cointegra tion and unit roots

Abstract: This paper provides an updated survey of a burgeoning literature on testing, estimation and model speciftcation in the presence of integrated variables. Integrated variables are a speciftc class of non-stationary variables which seem to characterise faithfully the properties of many macroeconomic time series. The analysis of cointegration develops out of the existence of unit roots and offers a generic route to test the validity of the equilibrium predictions of economic theories. Special emphasis is put on the empirical researcher's point of view.

Purchasing Power Parity in the Long Run: A Cointegration Approach

Abstract: This paper utilizes cointegration analysis to examine purchasing power parity relationships over a long-time horizon. The results indicate that the exchange rate is cointegrated strongly with the wholesale price index ratio and somewhat weakly with the consumer price index ratio. The cointegrating coefficient between the exchange rate and the price ratio is close to one when cointegration is confirmed. The hypothesis that the real exchange rate follows a random walk is rejected in most cases. Finally, a new test for common trends finds no such common trends in exchange rates or price ratios. Copyright 1990 by Ohio State University Press.

The Demand For Money In The United States: Evidence From Cointegration Tests

Abstract: This paper uses recent cointegration test procedures to investigate the underlying economic relationship between real money balances, real income, and interest rates for the United States. Unlike recent studies of money demand, the authors' analysis uses quarterly data spanning the period 1915-88, thus providing a sample encompassing a wide variety of economic experiences. The evidence presented indicates that the broader M2 measure of money is the preferable measure with which to consider the long-run effects of monetary policy. Copyright 1991 by Ohio State University Press.(This abstract was borrowed from another version of this item.)

The Econometric Analysis of Time Series - 2nd Edition

Abstract: This new edition of A.C. Harvey's clearly written, upper-level text has been revised and several sections have been completely rewritten. There is new material on a number of topics, including unit roots, ARCH, and cointegration. The Econometric Analysis of Time Series focuses on the statistical aspects of model building, with an emphasis on providing an understanding of the main ideas and concepts in econometrics rather than presenting a series of rigorous proofs. It explores the way in which recent advances in time series analysis have affected the development of a theory of dynamic econometrics, sets out an integrated approach to the problems of estimation and testing based on the method of maximum likelihood, and presents a coherent strategy for model selection.

Some Structural Hypotheses in a Multivariate Cointegration Analysis of the Purchasing Power Parity and the Uncovered Interest Parity for UK

Abstract: This paper develops some new tests for structural hypotheses in the framework of a multivariate error correction model with Gausian errors. The tests are constructed by an analysis of the likelihood function and motivated by an empirical investigation of the PPP relation and the UIP relation for the United Kingdom. Three types of tests are discussed. First, the authors' consider the same linear restrictions on all cointegration relations, then they consider the hypothesis that certain relations are assumed to be cointegrating, and finally they formulate a general hypothesis that contains the previous ones. This hypothesis can be expressed by the conditions that some of the cointegrating relations are subject to given linear restrictions, while others are unconstrained.

Purchasing power parity as a long-run relation

Abstract: Dickey–Fuller and Stock–Watson tests of purchasing power parity (PPP) as a long-run proposition are provided within the cointegration framework proposed by Granger. Since different countries use different weights to construct price indices, the traditional constraint that the coefficients on the price indices should be unity in the log-linear PPP relation is relaxed. The absence of a general PPP relation cannot be rejected. At most, a PPP relation is indicated in five out of fifteen country pairs that are examined. Even if a long-run PPP relation exists, it is not found to be useful in predicting future nominal exchange rates, which is consistent with efficient speculative markets.

Cointegration and Unit Roots: A Survey

Abstract: This paper provides an updated survey of a burgeoning literature on testing, estimation and model specification in the presence of integrated variables. Integrated variables are a specific class of non-stationary variables which seem to characterise faithfully the properties of many macroeconomic time series. The analysis of cointegration develops out of the existence of unit roots and offers a generic route to test the validity of the equilibrium predictions of economic theories. Special emphasis is put on the empirical researcher's point of view.

Monetary Impacts on Prices in the Short and Long Run: Some Evidence from New Zealand

Abstract: This paper presents support for long-run monetary neutrality based on evidence that individual time series for money, manufacturing prices, and agricultural prices are nonstationary but cointegrated, with a stationary proportional long-run relationship among their levels. Dynamic simulations from a vector error-correction model with this restriction imposed show that monetary shocks shift relative prices in favor of agriculture in the short run and permanently raise nominal prices. Manufacturing price shocks have similar long-run effects but initially place agriculture in a cost-price squeeze, while agricultural price shocks are transitory and have little impact on the other series.

The treasury yield curve as a cointegrated system

Abstract: This paper examines the temporal relationship between interest rates on Treasury securities ranging in maturity from three months to 30 years. We find strong empirical support that the seven Treasury rates selected are cointegrated, a conclusion that is insensitive to the normalization chosen. In particular, the hypothesis of noncointegration is rejeeted decisively regardless of the rate selected as the dependent variable in the cointegrating equation. To determine whether this information can be used to improve forecasts of Treasury rates, the seven rates are forecasted with a corresponding erroreorrection model that is shown to outperform an augmented VAR model that ignores the cointegration of the rates. The results are consistent with the belief that arbitrage limits the extent to which rates on different maturities of a given security diverge. In addition, the results confirm the appropriateness of imposing a common stochastic process for interest rates in equilibrium models of the term structure.

Asymptotic properties of residual based tests

Abstract: This paper develops an asymptotic theory for residual based tests for cointegration. These tests involve procedures that are designed to detect the presence of a unit root in the residuals of (cointegrating) regressions among the levels of economic time series. Attention is given to the augmented Dickey-Fuller (ADF) test that is recommended by Engle-Granger (1987) and the Z,, and Z, unit root tests recently proposed by Phillips (1987). Two new tests are also introduced, one of which is invariant to the normalization of the cointegrating regression. All of these tests are shown to be asymptotically similar and simple representations of their limiting distributions are given in terms of standard Brownian motion. The ADF and Z, tests are asymptotically equivalent. Power properties of the tests are also studied. The analysis shows that all the tests are consistent if suitably constructed but that the ADF and Z, tests have slower rates of divergence under cointegration than the other tests. This indicates that, at least in large samples, the Z,, test should have superior power properties. The paper concludes by addressing the larger issue of test formulation. Some major pitfalls are discovered in procedures that are designed to test a null of cointegration (rather than no cointegration). These defects provide strong arguments against the indiscriminate use of such test formulations and support the continuing use of residual based unit root tests. A full set of critical values for residual based tests is included. These allow for demeaned and detrended data and cointegrating regressions with up to five variables.

Cointegration, financial innovation and modelling the demand for money in Italy

Abstract: Problems encountered in the empirical modeling of the demand for money in Italy have usually been attributed to the presence of financial innovation in the last two decades. This paper constructs a model of the demand for M2 in Italy by explicitly incorporating variables that proxy the various processes of financial innovation. Various integration and cointegration tests are used in order to establish that the chosen regressors in the model are cointegrated. The Engle-Granger two-step estimation procedure is then used in order to estimate the authors' model, which is found to be stable over the last decade. Copyright 1990 by Blackwell Publishers Ltd and The Victoria University of Manchester

Cointegration in a macroeconomic system

Abstract: this paper represents an exploratory study that investigates the vector autoregressive properties of a time series system containing six main indicators of the austrian economy (gross domestic product gdp, private consumption, investment, gdp deflator, interest rate, wages). interest focuses on cointegrating structures in the system, i.e. on linear combinations of some (trending) variates that generate stationary series. johansen's (1987) procedure identifies three relations of this kind. it is also tried to give an economic interpretation to these relations. more extensively, a variety of sensitivity experiments are performed which make somehow original use of the technique of canonical correlations. contrary to the sensitivity experiments, a critical assessment of the identified structure by medium-term forecasting (until 1999) sheds considerable doubt on its correctness. at most one or two cointegrating relations may help to increase forecasting precision relative to traditional vector autoregression which do not use the idea of cointegration at all. on the other hand, using all three identified relations seems to impose "excess stationarity" on the system which is not replicated by actual data behavior.;

PC-GIVE and David Hendry's Econometric Methodology

Abstract: This paper summarizes David Hendry's empirical econometric methodology, unifying discussions in many of his and his co-authors' papers. Then, we describe how Hendry'S suite of computer programs PC-GIVE helps users implement that methodology. Finally, we illustrate that methodology and the programs with three empirical examples: post-war narrow money demand in the United Kingdom, nominal income determination in the United Kingdom from Friedman and Schwartz (1982), and consumers' expenditure in Venezuela. These examples help clarify the methodology'S central concepts, which include cointegration, error-correction, general-to-simple modelling, dynamic specification, model evaluation and testing, parameter constancy, and exogeneity.

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

Abstract: 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.

The Demand for Money in Argentina 1978- 1987: Before and After the Austral Program

Abstract: In this study, a monthly money-demand function for Argentina is estimated for a period that ends one month before the austral program (May 1985). The performance of the traditional econometric approach is compared with the new cointegration approach to time series econometrics. The comparison is carried out by a postsample forecast of the demand for money for a period of two years after the stabilization (until July 1987). The cointegration approach is found superior to the traditional approach. The first produces a relatively stable money demand, whereas the second yields an unstable one.

Ricardian Equivalence, Rational Expectations, and the Permanent Income Hypothesis

Abstract: The Ricardian equivalence proposition and the permanent income hypothesis are tested in an intertemporal consumption model with rational expectations. The representative consumer incorporates the government budget constraint. An alternative hypothesis of incomplete tax discounting is nested within this model. A deterministic time trend is rejected for the variables of the model. Variables exhibit instead a stochastic trend. The permanent income model is not rejected by annual U.S. data (i.e., no excess sensitivity is found). The evidence with respect to Ricardian equivalence is mixed. The empirical study employs theorems from the cointegration literature and specifically addresses issues of nonstationary regressors. Copyright 1990 by Ohio State University Press.

Manufacturing stocks: expectations, risk and co-integration*

Abstract: The modelling of firms inventory behaviour has been plagued by structural instability and despite a great deal of research effort over recent years little headway has yet been made in producing a structurally stable model of stock levels. Wallis et al. (I987) surveyed the main UK models of inventory behaviour and concluded that 'the tests of predictive failure are particularly powerful when conducted over periods in which data characteristics change, and over half the equations we consider are rejected on the basis of their predictive performance in the early i980s. This is a surprising result, since the poor performance of their predecessors over this period was a prime motivation for the research that has led to the current specifications. The similarity in turning points in the forecast errors, both for the aggregate stockbuilding equations and for the different categories of stocks, suggests the omission of some factor(s) common to all specifications' (Wallis et al., i987, p. 144). Their analysis was conducted using within-sample stability tests, and more recent data would undoubtedly find an even higher rejection rate. Accordingly, this paper seeks to identify important omitted components or misspecification in the existing models of inventory behaviour in response to the suggestion in the last sentence of the Wallis et al. quotation. We take as our point of departure a number of recent papers on company sector behaviour which have focused on intertemporal optimisation under rational expectations. The seminal work of Sargent (1978) on the demand for labour has been followed by a number of studies which seek to treat the firms expectations of future variables in an explicit way. This work includes Nickell (1 984) and Henry and Wren-Lewis (I 984) on the labour market and Hall et al. (I986) on the determination of stock levels. One common finding amongst these, and many other papers is that of a root in the dynamic process under consideration which is close to unity. This means that the long-run solution for the model is poorly determined and this finding is a cause for some concern. Recently, with the growth of the literature on cointegration (see Engle and Granger, 1987; Hall, I986), this finding takes on an even more serious aspect, since a symptom of non-cointegration is the lack of a well-defined long-run solution. So the finding of a near unit root may be indicative that earlier researchers were in fact working with sets of variables which failed to cointegrate, which would inevitably lead to 'spurious regression' problems in the sense of Granger and Newbold (I 974).

Non-Cointegration and Econometric Evaluation of Models of Regional Shift and Share

Abstract: This paper tests for cointegration between regional output of an industry and national output of the same industry. An equilibrium economic theory is presented to argue for the plausibility of cointegration, however, regional economic forecasting using the shift and share framework often acts as if cointegration does not exist. Data analysis on broad industrial sectors for 20 states finds very little evidence for cointegration. Forecasting models with and without imposing cointegration are than constructed and used to forecast out of sample. The simplest, non-cointegrating models are the best.

The intertemporal government budget constraint in the u.k., 1961-1986*

Abstract: In this paper, the intertemporal government budget constraint is implemented using a U.K. data base. In particular, the recently developed cointegration methodology is utilized to test whether the U.K. authorities engaged in bubble finance over the period 1961 to 1986. The authors' results are somewhat mixed in that although they find evidence of cointegration between government debt and an appropriate measure of the government surplus, they find that a vector autoregressive representation leads to a rejection of the intertemporal budget constraint. A novel aspect of their implementation concerns an adjustment for the effects of north sea oil on U.K. government finances. Copyright 1990 by Blackwell Publishers Ltd and The Victoria University of Manchester

Non-Cointegration and Econometric Evaluation of Models of Regional Shift and Share

Abstract: This paper tests for cointegration between regional output of an industry and national output of the same industry. An equilibrium economic theory is presented to argue for the plausibility of cointegration, however, regional economic forecasting using the shift and share framework often acts as if cointegration does not exist. Data analysis on broad industrial sectors for 20 states finds very little evidence for cointegration. Forecasting models with and without imposing cointegration are than constructed and used to forecast out of sample. The simplest, non-cointegrating models are the best.