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Implications of Cointegration for Forecasting: A Review and an Empirical Analysis

Seyed Mahdi Barakchian ()
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Seyed Mahdi Barakchian : Graduate School of Management and Economics, Sharif University of Technology

Journal of Money and Economy, 2012, vol. 7, issue 1, 87-118

Abstract: Cointegration has different theoretical implications for forecasting. Several empirical studies have compared the out of sample forecasting performance of cointegrated VECMs against unrestricted VARs in levels and in differences. The results of these studies have been generally mixed and inconclusive. This paper provides a comprehensive review over the subject, and also examines the effects of cointegration rank restrictions on forecasting performance of VAR models through conducting an empirical exercise in the framework of a new two-country (Canada-US) model. The results show that a VAR/DVAR model forecasts as well as the best cointegrated VAR model (and even better). Therefore, it seems that using cointegration techniques does not pay a dividend.

Keywords: Cointegration; Forecasting using VECX; Rank restrictions (search for similar items in EconPapers)
JEL-codes: C32 C51 C53 (search for similar items in EconPapers)
Date: 2012
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Handle: RePEc:mbr:jmonec:v:7:y:2012:i:1:p:87-118