Instrumental Variables Estimation of Stationary and Nonstationary Cointegrating Regressions

24 Pages Posted: 21 Jul 2008

See all articles by M. Gerolimetto

M. Gerolimetto

London School of Economics & Political Science (LSE)

Date Written: April 2006

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.

JEL Classification: C32

Suggested Citation

Gerolimetto, M., Instrumental Variables Estimation of Stationary and Nonstationary Cointegrating Regressions (April 2006). LSE STICERD Research Paper No. EM500, Available at SSRN: https://ssrn.com/abstract=1163550

M. Gerolimetto (Contact Author)

London School of Economics & Political Science (LSE)

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