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Long-run Relations in a Well Defined Statistical Model for the Data Generating Process. Cointegration Analysis of the PPP and the UIP Relations

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  • Katarina Juselius

    (Institute of Economics, University of Copenhagen)

Abstract

The concept of a well defined statistical model for the data generating process is given an empirical formulation in the vector autoregressive model under assumption of cointegration in an analysis of prices, interest rates and exchange rates between Denmark and Germany. The long-run relations are estimated as stationary linear combinations between the non-stationary variables and the presence of deterministic components in the common stochastic trends is investigated. Structural hypothesis on the purchasing power parity and uncovered interest rate hypothesis are tested in a full information maximum likelihood framework. Empirical support for both of these fundamental relations are found. Comparative analysis of the long-run relations based on the single equation ecm-model as well as the Engle-Granger two-step procedure are performed. The full system versus the partial system analysis approach is discussed in terms of optimal inference on the long-run parameters. By testing hypotheses on the weight coefficients it is empirically demonstrated that the full five-dimensional system cannot be reduced without loosing some efficiency.

Suggested Citation

  • Katarina Juselius, 1990. "Long-run Relations in a Well Defined Statistical Model for the Data Generating Process. Cointegration Analysis of the PPP and the UIP Relations," Discussion Papers 90-11, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:9011
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    Cited by:

    1. Stazka, Agnieszka, 2008. "International parity relations between Poland and Germany: a cointegrated VAR approach," MPRA Paper 24057, University Library of Munich, Germany.
    2. Philip Chimobi Omoke, 2012. "Bank Credit and Aggregate Import Demand in Nigeria: A Cointegration Analysis," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 3(3), pages 28-37, June.
    3. Podivinsky, Jan M., 1992. "Small sample properties of tests of linear restrictions on cointegrating vectors and their weights," Economics Letters, Elsevier, vol. 39(1), pages 13-18, May.
    4. Uctum, Merih, 1999. "European integration and asymmetry in the EMS," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 769-798, October.
    5. Andrade, Isabel, 1992. "The relationship between inflation and relative price variability: A multivariate approach," Discussion Paper Series In Economics And Econometrics 9203, Economics Division, School of Social Sciences, University of Southampton.
    6. Karfakis, Costas I & Parikh, Ashok, 1993. "A Cointegration Approach to Monetary Targeting in Australia," Australian Economic Papers, Wiley Blackwell, vol. 32(60), pages 53-72, June.
    7. Francisco Ledesma & Manuel Navarro & Jorge Perez & Simón Sosvilla, 1998. "Purchasing power parity and uncovered interest parity: The Spanish case," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 4(4), pages 335-348, November.
    8. Catherine Doz & Pierre Malgrange, 1992. "Modèles VAR et prévisions à court terme," Économie et Prévision, Programme National Persée, vol. 106(5), pages 109-122.

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