WHEN JOHANSEN SHOWS MORE THAN ONE COINTEGRATION VECTOR. BAD OR GOOD?

WHEN JOHANSEN SHOWS MORE THAN ONE COINTEGRATION VECTOR. BAD OR GOOD?               It is good to have more than one cointegrating ve...

WHEN JOHANSEN SHOWS MORE THAN ONE COINTEGRATION VECTOR. BAD OR GOOD?




              It is good to have more than one cointegrating vectors in a statistical sense, though not always in economical sense. More than one cointegration vectors implies the system stability. You can check the AR root table to see the number of unit root being imposed on your system. Mind you the less unit root imposed, the more stable your system. This is good for forecasting as well. Moreover, if you are inquisitive to identify shocks, more cointegrating vectors helps a lot; SVECM methodologies and PSVECM. In addition, there may be little or no difference in ARDL and VECM long and short run results because they both follow autoregressive specification. In essence, ARDL is a single picked equation in SVECM equations.

A THEORETICAL EXAMPLE


Let us assume that we have three variables,  unemployment rate(u) , real GDP rate(gdp) and exchange rate(e) . From the economic theory, there are two possible cointegration or long run equations which are the okuns law relation; u=f(gdp) and the goods market equilibrium(remember your IS-LM) equation; gdp=f(e) ; given  that u,gdp and e are  I(1) in nature. Also, lets us assumed that Johansen report that there are two cointegrating vectors ( or we based the selection  on prior economic knowledge) , this coincide with our macroeconomic theory.In this situation , you have to account for two cointegrating vectors in your estimation . This will make the system stable than when you only consider the okuns law alone or the goods market equilibrium . Moreover, this will help in identifying shock directly from the cointegrated variables than the fictions of assuming shocks which are very hard to identify like that of SVAR.

               


                    Article by  Olasehinde  Timilehin

 Contact: timmexeduconsult econometrics lab, ondo state, Nigeria.
timmexdareal@gmail.com
+2347033586042
+2347060868692
Specialize in some certain macroeconometrics modeling such as
VAR/VARX
SVAR/SVARX
VECM/VECMX
SVECM/SVECMX
ARDL/NARDL/QARDL/QAARDL......
forecasting and Nowcasting

Also visit: ECONOMICS AND FINANCE SCHOLARS ONLINE ECONOMETRICS LABORATORY ON FACEBOOK

                

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LIVE LOVE ECONOMICS: WHEN JOHANSEN SHOWS MORE THAN ONE COINTEGRATION VECTOR. BAD OR GOOD?
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