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Instrumental variables estimation of stationary and nonstationary cointegrating regressions

By GEROLIMETTO M. and P.M. ROBINSON

Abstract

Instrumental variables estimation is classically employed to avoid simultaneous equations bias in a stable environment. Here we use it to improve upon ordinary least-squares estimation of cointegrating regressions between non-stationary and/or long memory stationary variables where the integration orders of regressor and disturbance sum to less than 1, as happens always for stationary regressors, and sometimes for mean-reverting non-stationary ones. Unlike in the classical situation, instruments can be correlated with disturbances and/or uncorrelated with regressors. The approach can also be used in traditional non-fractional cointegrating relations. Various choices of instrument are proposed. Finite sample performance is examined

Topics: Cointegration, Instrumental variables estimation, I(d) processes.
Year: 2006
OAI identifier: oai:iris.unive.it:10278/26799
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