Testing for Common Cyclical Features in VAR Models with Cointegration

A.W. Hecq, F.C. Palm, J.R.Y.J. Urbain

Research output: Working paperProfessional

Abstract

We consider VAR models for variables exhibiting cointegration and common cyclical features. While the presence of cointegration reduces the rank of the long-run multiplier matrix, other types of common features lead to rank reduction of the short-run dynamics. We distinguish between strong and weak form reduced rank structures. Strong form reduced rank structures analyzed by Engle
and Kozicki (1993) arise when a linear combination of the first differenced variables in a cointegrated VAR is white noise whereas in the presence of a weak form reduced rank structure, linear combinations of the first differenced variables corrected for the long-run effects are white noise. The weak form has an interest in its own. For instance, it is a necessary condition for the existence
of first order codependent cycles in a VAR(2). Also, it is a necessary condition for the strong form. We also consider the mixed form which combines strong and weak forms. We discuss the model selection issues which arise from this distinction and propose a simple approach to testing for these structures using a sequence of likelihood ratio test statistics. The finite sample behavior of the
sequential approach is analyzed in a Monte Carlo experiment. Finally, we illustrate the relevance of the different forms of reduced ranks with an empirical analysis of US business fluctuations over the period 1954-1996.
Original languageEnglish
Place of PublicationMaastricht
PublisherMETEOR, Maastricht University School of Business and Economics
Number of pages32
Publication statusPublished - 1 Jan 2001

Publication series

SeriesMETEOR Research Memorandum
Number002

JEL classifications

  • c32 - "Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models"

Keywords

  • serial correlation common features
  • reduced rank structure
  • cointegration

Cite this