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Paper No' EM/2006/500: | Full paper
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Keywords: Cointegration; Instrumental variables estimation; I(d) processes.
JEL Classification: C32
Is hard copy/paper copy available? YES - Paper Copy Still In Print.
This Paper is published under the following series: Econometrics
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Abstract:Instrumental variables estimation is classically employed to avoid simultaneous equations bias in a stable environment. Here we use it to improve upon ordinary least squares estimation of cointegrating regressions between nonstationary and/or long memory stationary variables where the integration orders of regressor and disturbance sum to less than 1, as happens always for stationary regressors, and sometimes for mean-reverting nonstationary ones. Unlike in the classical situation, instruments can be correlated with disturbances and/or uncorrelated with regressors. The approach can also be used in traditional non-fractional cointegrating relations. Various choices of instrument are proposed. Finite sample performance is examined.
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