Stationary Vector Autoregressive Representation of Error Correction Models

Abstract

The paper introduces a stationary vector autoregressive (VAR) representation of the error correction model (ECM). This representation explicitly regards the cointegration error a dependent variable, making the direct implementation of standard dynamic analyses using standard VAR models possible, particularly with respect to the cointegration error. Of course, an ECM does not have an explicit VAR form, and thus, it is not convenient for conducting such dynamic analyses. In this regard, we transform the original nonstationary VAR model into a VAR model with the cointegration error and stationary variables. Finally, we employ the model to dynamically analyze the real exchange rate between the US dollar and the Japanese yen.

Share and Cite:

Y. Kim, "Stationary Vector Autoregressive Representation of Error Correction Models," Theoretical Economics Letters, Vol. 2 No. 2, 2012, pp. 152-156. doi: 10.4236/tel.2012.22027.

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1] J. Y. Campbell and R. J. Shiller, “Cointegration and Tests of Present Value Models,” Journal of Political Economy, Vol. 95, No. 5, 1987, pp. 1062-1088. doi:10.1086/261502
[2] R. Clarida and J. Gali, “Sources of Real Exchange Rate Fluctuations: How Important Are Nominal Shocks?” NBER Working Papers No. 4658, 1994.
[3] R. F. Engle and C. W. J. Granger, “CoIntegration and Error Correction: Representation, Estimation, and Testing,” Econometrica, Vol. 55, No. 2, 1987, pp. 251-276. doi:10.2307/1913236
[4] J. D. Hamilton, “Time Series Analysis,” Princeton University Press, Princeton, 1994.
[5] P. R. Hansen, “Granger’s Representation Theorem: A Closed-Form Expression for I(1) Processes,” Econometrics Journal, Vol. 8, No. 1, 2005, pp. 23-38. doi:10.1111/j.1368-423X.2005.00149.x
[6] S. Johansen, “Likelihood-Based Inference in Cointegrated Vector Autoregressive Models,” Oxford University Press, New York, 1995. doi:10.1093/0198774508.001.0001
[7] P. R. Krugman and R. E. Baldwin, “The Persistence of the US Trade Deficit,” Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, 1987, pp. 1-56.
[8] M. H. Pesaran and Y. Shin, “Cointegration and Speed of Convergence to Equilibrium,” Journal of Econometrics, Vol. 71, No. 1-2, 1996, pp. 117-143. http://dx.doi.org/10.1016/0304-4076(94)01697-6.
[9] C. A. Sims, “Macroeconomics and Reality,” Econometrica, Vol. 48, No. 1, 1980, pp. 1-48. doi:10.2307/1912017

Copyright © 2024 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.