Time varying cointegration and the UK Great Ratios
Stephen Millard (),
Simon Price () and
Essex Finance Centre Working Papers from University of Essex, Essex Business School
We re-examine the great ratios associated with balanced growth models and ask whether they have remained constant over time. We first use a benchmark DSGE model to explore how plausible smooth variations in structural parameters lead to movements in great ratios that are comparable to those seen in the UK data. We then employ a nonparametric methodology that allows for slowly varying coefficients to estimate trends over time. To formally test for stable relationships in the great ratios, we propose a statistical test based on these nonparametric estimators devised to detect time varying cointegrating relationships. Small sample properties of the test are explored in a small Monte Carlo exercise. Generally, we find no evidence for cointegration when parameters are constant, but strong evidence when allowing for time variation. The implications are that in macroeconometric models allowance should be made for shifting long-run relationships, including DSGE models where smooth variation should be allowed in the deep structural relationships.
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Working Paper: Time-varying cointegration and the UK great ratios (2019)
Working Paper: Time varying cointegration and the UK great ratios (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:esy:uefcwp:23320
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