Bounds Testing Approaches to the Analysis of Long-run Relationships

Mohammad Pesaran, Yongcheol Shin and Richard Smith ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper This paper develops a new approach to the problem of testing the existence of a long-run level relationship between a dependent variable and a set of regressors, when it is not known with certainty whether the underlying regressors are trend- or first-difference stationary. The proposed tests are based on standard F- and t-statistics used to test the significance of the lagged levels of the variables in a first-difference regression. Two sets of asymptotic critical values are provided: one set assuming that all the regressors are I(1) and another set assuming they are all I(0). These two sets of critical values provide a band covering all possible classifications of the regressors into I(0), I(1) or mutually cointegrated. Accordingly, various bounds testing procedures are proposed. The empirical relevance of the bounds procedures is demonstrated by a re-examination of the earnings equation included in the UK Treasury macro-econometric model. This is a particularly relevant application as there is considerable doubt concerning the order of integration of variables such as the unemployment rate, union strength and the wedge between the real product wage' and the real consumption wage' that enter the earnings equation

Keywords: Long-run relationship; Unrestricted error correction model; Cointegration; Unit roots; Bounds tests (search for similar items in EconPapers)
JEL-codes: C12 C22 C32 (search for similar items in EconPapers)
Date: 1999-02
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (87)

Downloads: (external link)
https://files.econ.cam.ac.uk/people-files/emeritus/mhp1/pss1.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Working Paper: Bounds Testing Approaches to the Analysis of Long Run Relationships (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:9907

Access Statistics for this paper

More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().