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Cointegration, long-run structural modelling and weak exogeneity

30 maart 2011

The new FEB Publication of the Month is dedicated to the article ‘Cointegration, long-run structural modelling and weak exogeneity: Two models of the UK economy’, by Dr Jan Jacobs. He and Kenneth Wallis (University of Warwick and holder of an honorary doctorate from the University of Groningen) have published the article in the Journal of Econometrics. ‘I am extremely proud of this paper’, says Jacobs.

Jan Jacobs
Jan Jacobs

The publication by Jacobs and Wallis was born in 2007, after a conference on cointegration. ‘The concept of cointegration has really taken off in the last twenty years’, explains Jacobs. ‘Cointegration can be defined as the co-movement between trending variables. This has attracted a great deal of attention in recent decades and many scientific research projects have been based on the concept. In 2003 this resulted in Clive Granger being awarded a Nobel prize for methods of analyzing economic time series with common trends (cointegration), together with Robert Engle who received a Nobel prize for methods of analyzing economic time series with time-varying volatility (ARCH).’

Conference

In 2007, twenty years after Engle and Granger’s pioneering article, an anniversary conference was held in Rotterdam. Jacobs: ‘Granger himself gave a presentation at the Rotterdam conference, but sadly he did not live to see the publication. He died in 2009.’

The conference was the direct cause of Jacobs and Wallis deciding to conduct new research together. ‘Our paper is about a topic that had to be left out of our previous cooperation, i.e. weak exogeneity.’

Weak exogeneity

‘Cointegration ideas as introduced by Granger are commonly embodied in empirical macroeconomic modelling through the vector error correction model (VECM). It has become common practice in these models to treat some variables as weakly exogenous, resulting in conditional VECMs’, says Jacobs. ‘Our paper studies the consequences of different approaches to weak exogeneity for the dynamic properties of such models, in the context of two models of the UK economy. Impulse response and common trend analyses are shown to be sensitive to these assumptions and other specification choices.’

Jacobs: ‘This is what we actually do: we have a model that we estimate with exogenous variables. We then examine the degree to which the dynamic characteristics of this model change if we make different assumptions for the processes behind the exogenous variables. This aspect has never before been examined as explicitly as we have in this paper.’

Hands-on analysis

‘One of the specific factors that played a role in our analysis is that we have the models on our own computers and calculate and duplicate the variants ourselves’, according to Jacobs. ‘Because I could do the exercises on my own computer we were not dependent on the builders of the models we were examining in such detail.’

In addition, Jacobs is full of praise for the short throughput time for his publication with Wallis. ‘We have only presented our paper once. The entire article process, from the start of the project up to and including publication, has taken about three years. That is very fast. I can’t emphasize that enough – it is extremely fast.’

More information

Jacobs, J.P.A.M. and K.F. Wallis, 2010, Cointegration, long-run structural modelling and weak exogeneity: Two models of the UK economy, Journal of Econometrics, 158,1, pp. 108-116
Full article: Sciencedirect.com (RUG only)

Contact: Jan Jacobs

Laatst gewijzigd:07 december 2015 15:25

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