Elsevier

Journal of Econometrics

Volume 71, Issues 1–2, March–April 1996, Pages 117-143
Journal of Econometrics

Cointegration and speed of convergence to equilibrium

https://doi.org/10.1016/0304-4076(94)01697-6Get rights and content

Abstract

This paper is concerned with the time profile of the effects of shocks on cointegrating relations in the context of a multivariate VAR(p) model. It considers alternative methods of characterizing and estimating such a time profile, and in particular proposes the application of the ‘persistence profile’ approach introduced in Lee and Pesaran (1993). It is shown that the estimator of the persistence profile of the cointegrating relations is root-T-consistent with a limiting normal distribution. The paper also shows that the persistence profile approach is invariant to the way shocks in the underlying VAR model are orthogonalized, which is not true of the traditional impulse response analysis. The theoretical framework is applied to an exchange rate and interest rate data set, and it is found that the persistence profile of the purchasing power parity (PPP) relation converges to zero very slowly, while the persistence profile of the uncovered interest parity (UIP) relation converges to zero reasonably quickly.

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    We would like to thank an editor and three anonymous referees of this journal, Adrian Pagan, Simon Potter, Soren Johansen, Peter Phillips, Clive Granger, Kevin Lee, and Colin Hargreaves for helpful comments and suggestions, and Junmo Yang for carrying out some preliminary computations when the ideas behind this paper were in their infancy. An earlier version of this paper was presented at the SPES European Workshop in Economic Theory and Econometrics held at Aarhus, Denmark, 1993, the Australasian Meeting of the Econometric Society at Sydney, 1993, and at the Universities of Warwick, Rochester, Indiana, and UCLA. Partial financial support from the ESRC (Grant No. R000233608) and the Isaac Newton Trust of Trinity College, Cambridge are gratefully acknowledged.

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