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Unit Roots, Cointegration, and Pretesting in Var Models

The views expressed here are the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

Abstract

This article investigates the robustness of impulse response estimators to near unit roots and near cointegration in vector autoregressive (VAR) models. We compare estimators based on VAR specifications determined by pretests for unit roots and cointegration as well as unrestricted VAR specifications in levels. Our main finding is that the impulse response estimators obtained from the levels specification tend to be most robust when the magnitude of the roots is not known. The pretest specification works well only when the restrictions imposed by the model are satisfied. Its performance deteriorates even for small deviations from the exact unit root for one or more model variables. We illustrate the practical relevance of our results through simulation examples and an empirical application.

Keywords

Acknowledgements

Acknowledgment

We would like to thank the participants at the 12th Annual Advances in Econometrics Conference for useful feedback. We are particularly indebted to Lutz Kilian for numerous detailed comments and insightful suggestions that substantially improved the presentation of the article.

Citation

Gospodinov, N., María Herrera, A. and Pesavento, E. (2013), "Unit Roots, Cointegration, and Pretesting in Var Models

The views expressed here are the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

", VAR Models in Macroeconomics – New Developments and Applications: Essays in Honor of Christopher A. Sims (Advances in Econometrics, Vol. 32), Emerald Group Publishing Limited, Leeds, pp. 81-115. https://doi.org/10.1108/S0731-9053(2013)0000031003

Publisher

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Emerald Group Publishing Limited

Copyright © 2013 Emerald Group Publishing Limited