Time varying cointegration and the UK great ratios

George Kapetanios, Stephen Millard, Katerina Petrova and Simon Price

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We re-examine the great ratios associated with balanced growth models and ask whether they have remained constant over time. We first use a benchmark DSGE model to explore how plausible smooth variations in structural parameters lead to movements in great ratios that are comparable to those seen in the UK data. We then employ a nonparametric methodology that allows for slowly varying coefficients to estimate trends over time. To formally test for stable relationships in the great ratios, we propose a statistical test based on these nonparametric estimators devised to detect time varying cointegrating relationships. Small sample properties of the test are explored in a small Monte Carlo exercise. Generally, we find no evidence for cointegration when parameters are constant, but strong evidence when allowing for time variation. The implications are that in macroeconometric models allowance should be made for shifting long-run relationships, including DSGE models where smooth variation should be allowed in the deep structural relationships.

Keywords: Time variation; great ratios; cointegration (search for similar items in EconPapers)
JEL-codes: C14 C26 C51 O4 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2018-10
New Economics Papers: this item is included in nep-ecm
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https://cama.crawford.anu.edu.au/sites/default/fil ... rd_petrova_price.pdf (application/pdf)

Related works:
Working Paper: Time-varying cointegration and the UK great ratios (2019)
Working Paper: Time varying cointegration and the UK Great Ratios (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2018-53

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