Estimating Cointegrating Relationships When There Is Uncertainty About The Time Series Properties of

Dr Garry Young ()
Authors registered in the RePEc Author Service: Kostas Mouratidis

No 135, National Institute of Economic and Social Research (NIESR) Discussion Papers from National Institute of Economic and Social Research

Abstract: A limitation of the current practice of pre-testing for unit roots before modelling cointegration is that unit root tests have low power in finite samples. As a result, series may be misclassified and estimation and inference dramatically affected. Phillips (1995) proposes a method based on the principle of fully modified least squares that can be used for estimation and inference whether the series are stationary, nonstationary or a mixture of both. Sheldon (1997) also proposes an IV method that deals with the case where the size of the root in the regressor is not known a priori. In an application to UK consumers' expenditure we show how the appropriate estimator may be chosen in the light of the available information.

Date: 1998-02
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