Long-run exclusion and the determination of cointegrating rank: Monte Carlo evidence

This note investigates long-run exclusion in a cointegrated vector autoregressive (VAR) model from the viewpoint of …nite-sample statistical inference. Monte Carlo experiments show that, in various circumstances, a mis-speci…ed partial VAR model, which is justi…ed by the existence of a long-run excluded variable, can lead to better …nite-sample inference for cointegrating rank than a fully-speci…ed VAR model. Implications of long-run exclusion for econometric modelling are then considered based on the Monte Carlo study. Key Words: Long-Run Exclusion, Cointegrating Rank, Cointegrated Vector Autoregressive Model, Monte Carlo Experiment. JEL Classi…cation Codes: C32, C52, C63.