Interpreting cointegrating vectors and common stochastic trends

It often proves difficult to give a satisfactory economic interpretation to estimated cointegrating vectors derived from the maximum likelihood estimation of unrestricted vector correction models. This paper shows that this is because, without introducing a priori information, they are not identifie...

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Bibliographic Details
Published in:Journal of econometrics 1996-10, Vol.74 (2), p.255-271
Main Author: Wickens, Michael R.
Format: Article
Language:English
Subjects:
Cointegration
Common stochastic trends
Econometrics
Economic theory
Estimating techniques
Identification
Mathematical methods
Nonstationarity
Stochastic models
Stochastic processes
Studies
Trends
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Summary:It often proves difficult to give a satisfactory economic interpretation to estimated cointegrating vectors derived from the maximum likelihood estimation of unrestricted vector correction models. This paper shows that this is because, without introducing a priori information, they are not identified. This is even true where there is only a single cointegrating vector. It is also shown that the common stochastic trends derived using VAR analysis in the presence of cointegration are not identified, nor can they be obtained uniquely from the estimated cointegrating vectors. The implication is that cointegration analysis needs to take account of structural restrictions after all. Consequently it is likely to be of less use in econometric model building than was first thought.
ISSN:0304-4076
1872-6895
DOI:10.1016/0304-4076(95)01746-1