Time Varying Cointegration and the UK Great Ratios

37 Pages Posted: 23 Oct 2018

See all articles by George Kapetanios

George Kapetanios

King's College, London

Stephen Millard

Bank of England

Katerina Petrova

University of St Andrews

Simon Price

City University London - Department of Economics; Essex Business School

Multiple version iconThere are 2 versions of this paper

Date Written: October 23, 2018

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

JEL Classification: C14, C26, C51, O4

Suggested Citation

Kapetanios, George and Millard, Stephen and Petrova, Katerina and Price, Simon G. and Price, Simon G., Time Varying Cointegration and the UK Great Ratios (October 23, 2018). CAMA Working Paper No. 53/2018, Available at SSRN: https://ssrn.com/abstract=3271396 or http://dx.doi.org/10.2139/ssrn.3271396

George Kapetanios

King's College, London ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom
+44 20 78484951 (Phone)

Stephen Millard

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Katerina Petrova

University of St Andrews ( email )

The Gateway
North Haugh
St Andrews, Fife KY16 9RJ
United Kingdom

Simon G. Price (Contact Author)

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
9
Abstract Views
292
PlumX Metrics