On the identification of cointegrated systems in small samples: a modelling strategy with an application to UK wages and prices
✍ Scribed by Jennifer V Greenslade; Stephen G Hall; S.G.Brian Henry
- Publisher
- Elsevier Science
- Year
- 2002
- Tongue
- English
- Weight
- 156 KB
- Volume
- 26
- Category
- Article
- ISSN
- 0165-1889
No coin nor oath required. For personal study only.
✦ Synopsis
This paper discusses the practical application of identiÿcation 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 vector error correction model (VECM) to the fully (over) identiÿed 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. In practice, this means that a thorough use of economic theory at an early stage, rather than treating a model as a pure statistical artefact, can yield enormous beneÿts.