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Irreducibility and structural cointegrating relations: an application to the G‐7 long‐term interest rates
Author(s) -
Barassi Marco R.,
Caporale Guglielmo Maria,
Hall Stephen G.
Publication year - 2001
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.147
Subject(s) - irreducibility , ranking (information retrieval) , economics , econometrics , term (time) , cointegration , variance (accounting) , german , set (abstract data type) , relation (database) , identification (biology) , point (geometry) , mathematical economics , interest rate , mathematics , macroeconomics , computer science , pure mathematics , physics , botany , accounting , archaeology , geometry , quantum mechanics , database , machine learning , biology , history , programming language
In this paper we examine the causal linkages between the G‐7 long‐term interest rates by using a new technique, which enables the researcher to analyse relations between a set of I (1) series without imposing any identification conditions based on economic theory. Specifically, we apply the so‐called Extended Davidson's Methodology (EDM), which is based on the innovative concept of an irreducible cointegrating (IC) vector, defined as a subset of a cointegrating relation that does not have any cointegrated subsets. Ranking the irreducible vectors according to the criterion of minimum variance allows us to distinguish between structural and solved relations. The empirical results provide support for the hypothesis that larger, more stable economies can achieve policy objectives more successfully by accommodating rather than driving other countries' policies. It appears that the driving force is Canada, which is linked to the USA, UK and France in three out of the four fundamental relations, and which is a reference point for the US, Italian and German rates, which are not cointegrated, seem to be determined by country‐specific factors. Copyright © 2001 John Wiley & Sons, Ltd.