Detecting long memory co-movements in macroeconomic time series

Gianluca Moretti ()
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Gianluca Moretti: Banca d'Italia, Research Department

No 642, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research Department

Abstract: Cointegration analysis tests for the existence of a significant long-run equilibrium among some economic variables. Standard econometric procedures to test for cointegration have proven unreliable when the long-run relation among the variables is characterized by non-linearities and persistent fluctuations around the equilibrium. As a consequence, many intuitive economic relations are empirically rejected. In this paper we propose a simple approach to account for non-linearities in the cointegrating equilibrium and possible long memory fluctuations from such equilibrium. We show that our correction allows us to test robustly for the presence of cointegration both under the null and alternative hypotheses. We apply our procedure to the Johansen-Juselius PPP-UIP database, and unlike the standard case, we do not fail to reject the null of no cointegration.

Keywords: Cointegration analysis; long memory (search for similar items in EconPapers)
JEL-codes: C22 C51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: Written 2007-09
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