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Applied cointegration analysis in the mirror of macroeconomic theory
Author(s) -
Söderlind Paul,
Vredin Anders
Publication year - 1996
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/(sici)1099-1255(199607)11:4<363::aid-jae402>3.0.co;2-8
Subject(s) - cointegration , econometrics , series (stratigraphy) , economics , monte carlo method , mathematics , statistics , paleontology , biology
Cointegration analyses of macroeconomic time series are often not based on fully specified theoretical models. We use a theoretical model to scrutinize common procedures in applied cointegration analysis. Monte Carlo experiments show that (1) some tests of the cointegration vectors do not work well on series generated by an equilibrium business cycle model; (2) cointegration restrictions add little to forecasting; (3) structural VAR models based on weak long‐run restrictions seem to work well. The main disadvantages of cointegration analysis without strong links to economic theory are that it makes it hard to estimate and interpret the cointegration vectors.