Cointegration for the Applied Economist
`This most commendable volume brings together a set of papers which permits ready access to the means of estimating quantitative relationships using cointegration and error correction procedures. Providing the data to show fully the basis for calculation,
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Also by B. Bhaskara Rao
THE ECONOMETRICS OF DISEQUILffiRIUM MODELS
Cointegration for the Applied Economist
Edited by
B. Bhaskara Rao
Associate Professor in Economics University of New South Wales Kensington, Australia
Palgrave Macmillan
ISBN 978-1-349-23529-2 (eBook) ISBN 978-0-333-61625-3 DOI 10.1007/978-1-349-23529-2 CO INTEGRATION Copyright© 1994 by B. Bhaskara Rao All rights reserved. No part of this book may be used for reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles or reviews. For information, address: St. Martin's Press, Scholarly and Reference Division, 175 Fifth Avenue, New York, N.Y. 10010 First published in the United States of America in 1994
ISBN 978-0-312-12177-8 (cloth) ISBN 978-0-312-15809-5 (paperback) Library of Congress Cataloging-in-Publication Data Cointegration : for the applied economist I edited by B. Bhaskara Rao. p. em. Includes bibliogra(Jhical references and index.
ISBN 978-0-312-12177-8 (cloth) ISBN 978-0-312-15809-5 (paperback)
1. Economics-Statistical methods. 2. Correlation (Statistics) I. Bhaskara Rao, B., 1939HBI37.C65 1994 330-dc20 94-5981 CIP
CONTENTS
LIST OF TABLES LIST OF FIGURES PREFACE NOTES ON THE CONTRIBUTORS
1.
IX
XU XV
xvn
EDITOR'S INTRODUCTION
B. Bhaskara Rao
2.
1.1
Introduction
1
1.2
Unit Roots and Cointegration
2
1.3
Some Guidelines
4
1.4
An Overview
5
1.5
Concluding Observations
8
A PRIMER ON COINTEGRATION WITH AN APPLICATION TO MONEY AND INCOME
David A. Dickey, Dennis W. Jansen and Daniel L. Thornton
2.1 2.2
Introduction Testing for Cointegration: A General Framework 2.2.1 Locating Stationary Linear Combinations of Variables 2.2.2 Multiple Cointegrating Vectors 2.2.3 Testing for Cointegration and their Relation to Unit Root Tests
9 10
12 14 15
VI
2.3
2.4
2.5
2.6 3.
Is There an Economic Interpretation of Cointegration Vectors? 2.3.1 Cointegrating with Exogenous Variables 2.3.2 Should there be Many or Few Cointegrating Vectors? Alternative Test for Cointegration 2.4.1 A Note about Distributions 2.4.2 Other Approaches to Cointegration An Application of Cointegration: The Demand for Money 2.5.1 The Velocity of M1 and M2 2.5.2 The Velocity of 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 Summary and Conclusions Appendix to Chapter 2
17 18 22 24 26 27 28 29 32 33 34 35 38 39 42 43
UNIT ROOTS AND COINTEGRATION FOR THE ECONOMIST
Darryl Holden and Roger Perman
3.1 3.2
3.3
Introduction Stationarity and Unit Roots 3.2.1 Stationary Time Series 3.2.2 The First Order Autoregressive Process 3.2.3 Second Order Autoregressive Case 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 3.3.4 Phillips and Perron Tests
47 49 49 50 54 56 56 60 62 66
Vll
3.4 3.5
3.6 3.7 4.
3.3.
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