Showing papers on "Cointegration published in 1991"

Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots

Abstract: This paper is an introduction to unit root econometrics as applied in macroeconomics. The paper first discusses univariate time series analysis, emphasizing the following topics: alternative representations of unit root processes, unit root testing procedures, the power of unit root tests, and the interpretation of unit root econometrics in finite samples. A second part of the paper tackles similar issues in a multivariate context where cointegration is now the central concept. The paper reviews representation, testing, and estimation of multivariate time series models with some unit roots. Two important themes of this paper are first, the importance of correctly specifying deterministic components of the series; and second, the usefulness of unit root tests not as methods to uncover some -true relation" but as practical devices that can be used to impose reasonable restrictions on the data and to suggest what asymptotic distribution theory gives the best approximation to the finite-sample distribution of coefficient estimates and test statistics.

Stochastic Trends and Economic Fluctuations

Abstract: Are business cycles mainly the result of permanent shocks to productivity? This paper uses a long-run restriction implied by a large class of real-business-cycle models--identifying permanent productivity shocks as shocks to the common stochastic trend in output, consumption, and investment--to provide new evidence on this question. Econometric tests indicate that this common-stochastic-trend/cointegration implication is consistent with postwar U.S. data. However, in systems with nominal variables, the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business-cycle variability in output, consumption, and investment. Copyright 1991 by American Economic Association.

Long-Run Economic Relationships: Readings in Cointegration

Abstract: This is a survey of recent developments in the field of cointegration, which links long run components of a pair or of a group of series. It can then be used to discuss some types of equilibrium and to introduce them into time-series models in a fairly uncontroversial way. The idea was introduced in the early 1980s and has generated much interest since then amongst econometricians and macroeconomists. The authors discuss the basic ideas in their introduction, and the final chapters review the most recent developments in the field in a non-technical way that will enable economists with some training in modern econometrics to understand and appreciate these developments.

A Primer on Cointegration with an Application to Money and Income

Abstract: For some time now, macroeconomists have been aware that many macroeconomic time-series are not stationary in their levels and that many time-series are most adequately represented by first differences.1 In the parlance of time-series analysis, such variables are said to be integrated of order one and are denoted I(1). The level of such variables can become arbitrarily large or small so there is no tendency for them to revert to their mean level. Indeed, neither the mean nor the variance is a meaningful concept for such variables.

Cointegration Tests and Spatial Price Linkages in Regional Cattle Markets

Abstract: This analysis empirically evaluates spatial linkages in regional cattle markets using cointegration tests of regional price series. Several markets were not cointegrated over the 1980 through 1987 period. However, significant increases in cointegration of several regional livestock markets are observed through the 1980s. The increased cointegration parallels significant structural changes in the livestock industry. A formal analysis of market characteristics reveals that distances between markets, industry concentration ratios, market volumes, and market types have significant influences on cointegration relationships between markets.

Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots

Abstract: This paper is an introduction to unit root econometrics as applied in macroeconomics. The paper first discusses univariate time series analysis, emphasizing the following topics: alternative representations of unit root processes, unit root testing procedures, the power of unit root tests, and the interpretation of unit root econometrics in finite samples. A second part of the paper tackles similar issues in a multivariate context where cointegration is now the central concept. The paper reviews representation, testing, and estimation of multivariate time series models with some unit roots. Two important themes of this paper are first, the importance of correctly specifying deterministic components of the series; and second, the usefulness of unit root tests not as methods to uncover some -true relation" but as practical devices that can be used to impose reasonable restrictions on the data and to suggest what asymptotic distribution theory gives the best approximation to the finite-sample distribution of coefficient estimates and test statistics.

Cointegration: An Introduction to the Literature

Abstract: An overview of the cointegration approach to econometric specification and estimation is provided. A non‐technical approach is adopted, and is intended to serve as an entry into this important new literature for the reader with no background knowledge of the subject but with some limited knowledge of econometrics. Particular emphases are given to the rationale for using cointegration techniques in the estimation of economic relationships, to providing intuitive explanations of the concepts and techniques, and to demonstrating their applications in practice. Reference is made throughout to other articles which explain particular methods or recent developments more formally and fully than is possible here. Finally, a simple application of cointegration techniques to the estimation of the consumption function is provided.

Nonlinear transformations of integrated time series

Abstract: . In this paper we consider the effects of nonlinear transformations on integrated processes and unit root tests performed on such series. A test that is invariant to monotone data transformations is proposed. It is shown that series are generally not cointegrated with nonlinear transformations of themselves, but the same transformation applied to a pair of cointegrated series can result in cointegration between the transformed series.

Cointegration and Government Borrowing Constraints: Evidence for the United States

Abstract: Testable implications are derived in a present-value borrowing-constraint model for the U.S. federal government. Critical values for unit-root and cointegration tests are calculated with Monte Carlo studies. Cointegration techniques are employed to determine whether the government has been involved in perpetual debt financing in recent years. The data reject this assertion.

Long-run Income and Interest Elasticities of Money Demand in the United States

Abstract: Econometric techniques designed to accommodate nonstationary data are used to reexamine the stability of interest and income elasticities of money demand in the United States. Estimates based on postwar monthly data reveal a stable relationship between M1 velocity and various measures of interest rates that proxy the opportunity cost of holding money balances. Tests for the existence of cointegration and methods used to estimate the income and interest elasticities are based on procedures prescribed by Soren Johansen (1988). Corresponding error correction estimates offer insight as to the dynamics of the process that maintains the equilibrium relation between velocity and interest rates. Copyright 1991 by MIT Press.

Testing Purchasing Power Parity under the Null Hypothesis of Co-Integration

Abstract: This paper analyzes monthly data on the exchange rates and price indices of the eleven major industrial countries over the modern period of floating exchange rates. It presents tests that are based upon the null hypothesis of cointegration. The paper finds evidence that most country pairs not involving North American currencies have exchange rates and price indices that are cointegrated. It estimates the error correction representation for the series that are cointegrated and it shows that the dynamic adjustment of the relationship between exchange rates and prices is accomplished almost entirely in the market for foreign exchange. Copyright 1991 by Royal Economic Society.

Testing the Relationship between Unemployment and Crime: A Methodological Comment and Empirical Analysis Using Time Series Data from England and Wales:

Abstract: The work of Cantor and Land (1985) on the unemployment crime rate relationship is subjected to a methodological critique. The ideas of integration and cointegration are introduced to show that the models employed by Cantor and Land are misspecified. The arguments are illustrated using annual data from England and Wales.

Commodity and Developing Country Terms of Trade: What Does the Long Run Show?

Abstract: Recently, the debate surrounding the commodity net barter terms of trade and the terms of trade of developing countries has entered a new phase. In this JOURNAL, Spraos (I980) presents evidence of a 'stable' declining commodity, terms of trade and Sapsford (i985), although fl'nding 'instability' in the work of Spraos, argues in support of the 'stable' declining terms of trade hypothesis. Grilli and Yang (I988), henceforth GY, also provide evidence supporting this view and state the implications of this finding for developing-country terms of trade. A major contribution of GY is a published set of data on the main price indices with a high degree of consistency for the whole century.1 However, Cuddington and Urzua (I989) in thisJOURNAL, illustrate that the hypothesis of a 'secular deterioration' in the commodity terms of trade is not robust to the alternative claim that there was a once-and-for-all shift in commodity prices in the period I920-I. After taking this shift into account these authors find little evidence to support the view of a 'secular decline'. 2 This debate has important implications for the 'Prebisch-Singer' hypothesis of a 'stable declining commodity terms of trade' (see for instance Prebisch, I 950) . It also has implications for both development and stabilisation strategies adopted by commodity-dependent developing countries. A central issue in this analysis is the order of integration of the commodity terms of trade. A time series is said to be integrated of order o, I(o), if its mean and variance are constant, or roughly speaking if the series is stationary. A time series is said to be I(n) if the series requires first differencing n times before a stationary series is obtained. Alternatively, if adding a time trend is sufficient to induce stationarity, the series is termed 'trend stationary'. A 'trend stationary' series implies that the variable in question simply adjusts around a constant growth path, but an I(i) series is truly non-stationary and displays very different properties. A commonly cited example of an 1(i) series is the random walk. The order of integration of a single time series is related to the idea of cointegration of a number of time series. Consider two variables, X and Y, that are not themselves I (o) but are of the same order of integration. If the residuals from regressing X on Y, or vice versa, are I(o), or roughly speaking if the residuals are stationary, it can be concluded that the two variables are cointegrated. In turn this implies that there is some form of equilibrium

Petrol prices, oil price rises and oil price falls: some evidence for the UK since 1972

Abstract: This paper examines the relationship between retail petrol prices, excise duties and crude oil prices in the UK over the period 1973–1988. The existence of a stable relationship between the petrol price, level of excise duty and spot oil price is confirmed through use of the cointegration approach. Although the speed of reaction of petrol prices to changes in the crude price depends on whether crude prices are rising or falling, any asymmetry in the pricing response is virtually absent after an adjustment period of only four months.

Convergence of International Output Movements

Abstract: This paper explores the convergence of real per capita output in advanced industrialized economies. We start by observing that in a stochastic environment. convergence in per capita GDP requires that permanent shocks to one econ~ be associated with permanent shocks to other economies. Convergence is a natural outcome, of models where exogenous technical change migrates across countries with similar microeconomic specifications. Conversely, in a world where some component of permanent output movements is due to technical change whereas other components are due to domestic factors. national economies may diverge over time. we formalize a general definition of convergence using the notions of unit roots and cointegration developed in the time series literature. We construct bivariate and multivariate tests of convergence across advanced industrialized economies. Our evidence indicates that one cannot reject the no convergence null. Further. the estimated time series representation of cross-country output deviations exhibits substantial persistence. These results suggest that previous empirical work on convergence has neglected some aspects of the null hypothesis.

Cointegration Analysis of the Advertising-Sales Relationship

Abstract: The examination of stochastic properties of the annual advertising and sales data from the Lydia Pinkham Company reveals that the series are cointegrated and, therefore, possess a long-run equilibrium condition. According to the estimates of the error correction model of the series, in the short-run advertising is found to be more responsive than sales in adjustments to eliminate departures from the long-run equilibrium condition. The author's analysis, in general, implies that the observed business firms' decision rules fixing advertising spending as a percentage of sales revenue may hold as a long-run equilibrium condition. Copyright 1991 by Blackwell Publishing Ltd.

Economic Structural Change: Analysis and Forecasting

Abstract: In modern economic model building, structural change is a key concept. Economic growth and events like the oil price shocks have impacts on the economic system such that models with fixed structure are illusions. Considerable progress has been made in the last few years concerning statistical and econometric tools. Methods for identification of structural change, models that are robust to changes and assimilate their effects, and adequate forecasting techniques have been developed. Under the auspices of IIASA a very active community of statisticians and econometricians has made a very influential effort in this area. The purpose of this volume is to document these activities, to present new methods and developments in this area, and to demonstrate applications. Particular weight is given to nonparametric and robust methods for identification of and modeling under structural change, a Bayesian approach to forecast combination, and time-varying parameter cointegration. This book has four parts: (1) Identification of structural change, (2) Model building in the presence of structural change, (3) Forecasting in the presence of structural change, and (4) Economic modeling and the use of empirical data. The book provides an up-to-date status report on the field and should stimulate applications of the methods in empirical work as well as further research.

Wage Growth and the Inflation Process: An Empirical Note

Abstract: A central proposition in the Phillips curve view of the inflation process is that prices are marked up over productivity-adjusted labor costs. If that is true, then long-run movements in prices and labor costs must be correlated. If long-run movements in a time series are modeled as a stochastic trend, then the above noted implication of the 'price markup' view is related to the concept of cointegration discussed in Granger (1986), which says that cointegrated multiple time series share common stochastic trends. The evidence reported here shows that time series measuring rates of change in prices and labor costs are cointegrated. Furthermore, this cointegration appears consistent with Granger-causality running from the rate of change in prices to the rate of change in labor costs, but not vice versa as suggested by the 'price markup' view.

Testing Weak Exogeneity and the Order of Cointegration in UK Money Demand Data

Abstract: This paper discusses autoregressive models allowing for processes integrated of order 2 and the various types of cointegration that can occur. A statistical analysis of such models that allows for the determination of the order of integration and the cointegrating ranks is outlined. The notion of weak exogeneity is discussed for I(1) processes. The results are illustrated by the UK money data of Hendry and Ericsson (1991).

Correct Cointegration Tests of the Long Run Relationship Between Nominal Interest and Inflation

Abstract: The Fisher (1930) hypothesis suggests that a long run equilibrium relationship exists between the nonstationary series: nominal interest and expected inflation. Testing such a cointegrating relationship is complicated by the presence of the unobserved ex ante real rate of interest in residuals from the cointegrating regression. Assumptions concerning the stochastic properties of the expected real rate of interest are examined and two proxies for the ex ante real rate are employed in multivariate cointegration tests of the Fisher hypothesis.