Dynamic Factor Models, Cointegration, and Error Correction Mechanisms

Cointegration and Error Correction

1 The Background Elementary courses in statistics introduce at an early stage the key assumption of “random sampling”. In more technical language, the data set is assumed to be identically and independently distributed (i.i.d.). In this framework a range of simple and elegant results can be derived, for example, that the variance of the mean of n observations is 1/n times the variance of the ob...

Not Just for Cointegration: Error Correction Models with Stationary Data

The error correction model is generally thought to be isomorphic to integrated data and the modeling of cointegrated processes, and as such, is considered inappropriate for stationary data. Given that many political time series are not integrated, analysts are unable to take advantages of the error correction model’s ability to capture both long and short-term dynamics in a single statistical m...

Testing for Cointegration in Nonlinear STAR Error Correction Models

In this paper we propose a new testing procedure to detect the presence of a cointegrating relationship that follows a globally stationary smooth transition autoregressive (STAR) process. We start from a general VAR model, embed the STAR error correction mechanism (ECM) and then derive the generalised nonlinear STAR error correction model. We provide two operational versions of the tests. First...

Exports and Economic Growth in Asian Developing Countries: Cointegration and Error-Correction Models

This paper uses cointegration and error-correction models to analyze the causal relationship between export growth and economic growth in eight Asian developing countries using annual data from 1960 to 1997. While conventional wisdom suggests that export growth contribute positively to economic growth, this study also provides strong evidence supporting the export-led growth hypothesis. The emp...

A Comparison of Threshold Cointegration and Markov-Switching Vector Error Correction Models in Price Transmission Analysis