Working Paper: CEPR ID: DP1120
Authors: Paul Soderlind; Anders Vredin
Abstract: Applied cointegration analysis has much to gain from strong links with economic theory. For example, the current generation of equilibrium macroeconomic models have simple predictions for cointegrating vectors. These models also suggest that important information about the economic structure can be found in the short-run dynamics, which most cointegration studies disregard. Simulations of a stochastic business cycle model show that tests of cointegrating vectors, forecasts, and variance decompositions based on long-run assumptions can be sharpened by imposing even very simple economic restrictions.
Keywords: cointegration; money demand; stochastic growth model
JEL Codes: C32; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cointegration analysis (C32) | macroeconomic theory (B22) |
| economic restrictions (P33) | performance of statistical methods (C52) |
| long-run relations (C22) | equilibrium relations (D50) |
| short-run fluctuations (E32) | information about economic behavior (D89) |
| long-run restrictions (C51) | identification of shocks to the economy (E32) |
| theoretical grounding (C90) | meaningful economic insights (E29) |