Efficient estimation of the seemingly unrelated regression cointegration model and testing for purchasing power parity

Hyungsik Roger Moon, Benoit Perron

Research output: Contribution to journalArticle

20 Citations (Scopus)

Abstract

This paper studies the efficient estimation of seemingly unrelated linear models with integrated regressors and stationary errors. We consider two cases. The first one has no common regressor among the equations. In this case, we show that by adding leads and lags of the first differences of the regressors and estimating this augmented dynamic regression model by generalized least squares using the long-run covariance matrix, we obtain an efficient estimator of the cointegrating vector that has a limiting mixed normal distribution. In the second case we consider, there is a common regressor to all equations, and we discuss efficient minimum distance estimation in this context. Simulation results suggests that our new estimator compares favorably with others already proposed in the literature. We apply these new estimators to the testing of the proportionality and symmetry conditions implied by purchasing power parity (PPP) among the G-7 countries. The tests based on the efficient estimates easily reject the joint hypotheses of proportionality and symmetry for all countries with either the United States or Germany as numeraire. Based on individual tests, our results suggest that Canada and Germany are the most likely countries for which the proportionality condition holds, and that Italy and Japan for the symmetry condition relative to the United States.

Original languageEnglish
Pages (from-to)293-323
Number of pages31
JournalEconometric Reviews
Volume23
Issue number4
DOIs
Publication statusPublished - 2004 Dec 1

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Proportionality
Testing
Efficient estimation
Estimator
Purchasing power parity
Cointegration
Symmetry
Seemingly unrelated regression
Germany
Integrated
Lag
Canada
Numeraire
Regression model
Covariance matrix
Simulation
Japan
Minimum distance estimation
Generalized least squares
G-7 countries

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Cite this

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Efficient estimation of the seemingly unrelated regression cointegration model and testing for purchasing power parity. / Moon, Hyungsik Roger; Perron, Benoit.

In: Econometric Reviews, Vol. 23, No. 4, 01.12.2004, p. 293-323.

Research output: Contribution to journalArticle

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