Time-varying Cointegration and the UK Great Ratios

40 Pages Posted: 19 Apr 2019

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: April 18, 2019

Abstract

We re-examine the great ratios associated with balanced growth models and ask whether they have remained constant over time. Having first looked at whether Kaldor’s stylised facts still apply to the UK data, we employ a nonparametric methodology that allows for slowly varying coefficients to estimate trends over time. We formally test for stable relationships in the great ratios with a new statistical test based on these nonparametric estimators designed to detect time varying cointegrating relationships. Small sample properties of the test are explored in a small Monte Carlo exercise. Generally, we find little evidence for cointegration when parameters are constant, but strong evidence when allowing for time variation. The implications are that in macroeconometric models (including DSGE models), provision should be made to explicitly facilitate such shifting long-run 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 (April 18, 2019). Bank of England Working Paper No. 789, Available at SSRN: https://ssrn.com/abstract=3374400 or http://dx.doi.org/10.2139/ssrn.3374400

George Kapetanios

King's College, London ( email )

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

Stephen Millard (Contact Author)

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

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

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