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Co-integration and error correction: Representation, estimation, and testing

Robert Engle and Clive Granger

Applied Econometrics, 2015, vol. 39, issue 3, 106-135

Abstract: The relationship between co-integration and error correction models, first suggested in Granger (1981), is here extended and used to develop estimation procedures, tests, and empirical examples. If each element of a vector of time series x, first achieves stationarity after differencing, but a linear combination a’x_t is already stationary, the time series x, are said to be co-integrated with co-integrating vector a. There may be several such co-integrating vectors so that a becomes a matrix. Interpreting a’x_t = 0 as a long run equilibrium, co-integration implies that deviations from equilibrium are stationary, with finite variance, even though the series themselves are nonstationary and have infinite variance. The paper presents a representation theorem based on Granger (1983), which connects the moving average, autoregressive, and error correction representations for co-integrated systems. A vector autoregression in differenced variables is incompatible with these representations. Estimation of these models is discussed and a simple but asymptotically efficient two-step estimator is proposed. Testing for co-integration combines the problems of unit root tests and tests with parameters unidentified under the null. Seven statistics are formulated and analyzed. The critical values of these statistics are calculated based on a Monte Carlo simulation. Using these critical values, the power properties of the tests are examined and one test procedure is recommended for application. In a veries of examples it is found that consumption and income are co-integrated, wages and prices are not, short and long interest rates are, and nominal GNP is co-integrated with M2, but not M1, M3, or aggregate liquid assets. (in Russian)

Keywords: co-integration; vector autoregression; unit roots; error correction; multivariate time series; Dickey–Fuller tests (search for similar items in EconPapers)
JEL-codes: C01 C12 C30 C33 C51 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (49)

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Journal Article: Co-integration and Error Correction: Representation, Estimation, and Testing (1987) Downloads
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