Cointegration for the

Applied Economist
Second Edition

Edited by

B. Bhaskara Rao

Contents
List of Tables

List of Figures and Screens

xiii

Preface to the First Edition

xiv

Preface to the Second Edition

xvi

Notes on Contributors
1 Introduction
B. Bhaskara Rao
1.1 Introduction
1.2 Unit roots and cointegration
1.3 Economic implications
1.4 An overview of the papers
1.5 Concluding observations
2 A Primer on Cointegration with an Application
to Money and Income
David A. Dickey, Dennis W. Jansen and Daniel L. Thornton
2.1 Introduction
2.2 Testing for cointegration: a general framework
2.2.1 Locating stationary linear combination
of variables
2.2.2 Multiple cointegrating vectors
2.2.3 Tests for cointegration and their relation
to unit root tests
2.3 Is there an economic interpretation
of cointegration vectors?
2.3.1 Cointegration with exogenous variables
2.3.2 Should there be many or few
cointegrating vectors?
2.4 Alternative tests for cointegration
2.4.1 A note about distributions
2.4.2 Other approaches to cointegration

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2.5

An application of cointegration: the

demand for money
2.5.1 The velocity of Ml and M2
2.5.2 The velocity of the monetary base
2.5.3 Empirical results
2.5.4 Tests for the order of integration
2.5.5 Tests for cointegration using three
methodologies
2.5.6 Cointegration using alternative monetary
aggregates
2.5.7 Cointegration and the monetary base
2.6 Summary and conclusions
Appendix to Chapter 2

3 Unit Roots and Cointegration for

the Economist
Darryl Holden and Roger Perman
3.1 Introduction
3.2 Stationarity and unit roots
3.2.1 Stationary time series
3.2.2 The first order autoregressive process: AR(1)
3.2.3 Second order autoregressive case: AR(2)
3.3 Testing for unit roots
3.3.1 The Dickey-Fuller tests
3.3.2 The Augmented Dickey-Fuller regression
3.3.3 A suggested sequential procedure for unit
root testing
3.3.4 Phillips and Perron tests
3.3.5 Unit root tests and structural breaks
3.3.6 Trend and difference stationarity
3.4 The error correction mechanism (ECM)
3.5 Cointegration
,
3.5.1 The cointegrating regression
3.5.2 Testing for cointegration
3.5.3 Estimating the ECM
3.5.4 Johansen procedure
3.6 Cointegration and econometric modelling
3.7 Concluding comments
Appendix to Chapter 3

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Contents vii

The Significance of Unit Roots and the Pitfalls

of Mechanical Statistics
Ron Smith
4.1 Introduction
4.2 Mechanical statistics
4.3 Applied econometrics
4.4 Significance
4.5 Unit roots
4.6 VARs, error correction and cointegration
4.7 Weak exogeneity
4.8 Identification
4.9 Conclusions
Unit Roots and Structural Breaks: A Survey
of the Literature

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Joseph P. Byrne and Roger Perman

5.1
5.2
5.3
5.4
5.5
5.6

Introduction
Unit roots and ADF tests
Exogenous structural breaks
Endogenous structural breaks
Non-linear breaks and GLS detrending
Multiple structural breaks
5.6.1 Two structural breaks
5.6.2 Multiple breaks
5.7 Unit roots and structural breaks: applied
papers
5.8 Other issues
5.9 Conclusion
5.10 Software

New Unit Root Tests Designed for the

Trend-Break Stationary Alternative:
Simulation Evidence and Empirical
Applications
Amit Sen
6.1 Introduction
6.2 Model and test statistics
6.3 Finite sample size and power
6.4 Empirical applications
6.4.1 Extended Nelson-Plosser data set

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6.4.2

Real per capita GDP for 18

OECD countries
6.5 Conclusions
Appendix A
Appendix B

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7 How to Deal with Structural Breaks

in Practical Cointegration Analysis?

195

Roselyne Joyeux
7.1 Introduction
7.2 Univariate case
7.2.1 Shift in intercept model
7.2.2 Shift in mean and trend model
7.2.3 Generalization to an AR(k) process
7.2.4 Generalization to the case of more than
one shift
7.3 Multivariate case
7.3.1 Shift in intercept model: none of the
p time series have a deterministic trend
7.3.2 Some or all of the time series follow a
trending pattern
7.3.3 Some or all of the time series follow a trending
pattern in each sub-sample and the
cointegrating relations are stationary
in each sub-sample (with possibly a
broken constant level); trend breaks are
allowed only in the non-stationary series
7.3.4 Unit root tests
7.4 Empirical illustration: A German
money-demand system
7.4.1 Description
7.4.2 The analysis
7.5 Conclusion
Appendix to Chapter 7
7A.1 Specification of the model: deterministic components ,
and exogenous variables
7A.2 Cointegration tests
7A.3 Empirical illustration: a German money-demand
system
7A. 4 Other important matters

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Panel Cointegration Analysis:

An Empirical Example

222

N.R. Vasudeva Murihy

Introduction
Model specification, data and cointegration
analysis
8.3 Empirical results
8.4 Conclusions
Appendix to Chapter 8

222

References

245

Index

257

8.1
8.2

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