Cointegration and Error Correction Mechanisms for Singular Stochastic Vectors

Matteo Barigozzi, Marco Lippi and Matteo Luciani

Econometrics, 2020, vol. 8, issue 1, 1-23

Abstract: Large-dimensional dynamic factor models and dynamic stochastic general equilibrium models, both widely used in empirical macroeconomics, deal with singular stochastic vectors, i.e., vectors of dimension r which are driven by a q -dimensional white noise, with q < r . The present paper studies cointegration and error correction representations for an I ( 1 ) singular stochastic vector y t . It is easily seen that y t is necessarily cointegrated with cointegrating rank c ≥ r − q . Our contributions are: (i) we generalize Johansen’s proof of the Granger representation theorem to I ( 1 ) singular vectors under the assumption that y t has rational spectral density; (ii) using recent results on singular vectors by Anderson and Deistler, we prove that for generic values of the parameters the autoregressive representation of y t has a finite-degree polynomial. The relationship between the cointegration of the factors and the cointegration of the observable variables in a large-dimensional factor model is also discussed.

Keywords: singular stochastic vectors; cointegration for singular vectors; Granger representation theorem; large-dimensional dynamic factor models) (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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