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812
A Simple Estimator of Cointegrating Vectors in Higher Order Cointegrated Systems," Econometrica 61
, 1993
"... Efficient estimators of cointegrating vectors are presented for systems involving deterministic components and variables of differing, higher orders of integration. The estimators are computed using GLS or OLS, and Wald Statistics constructed from these estimators have asymptotic x2 distributions. T ..."
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Cited by 237 (3 self)
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Efficient estimators of cointegrating vectors are presented for systems involving deterministic components and variables of differing, higher orders of integration. The estimators are computed using GLS or OLS, and Wald Statistics constructed from these estimators have asymptotic x2 distributions. These and previously proposed estimators of cointegrating vectors are used to study longrun U.S. money (Ml) demand. Ml demand is found to be stable over 19001989; the 95 % confidence intervals for the income elasticity and interest rate semielasticity are (.88,1.06) and (.13,.08), respectively. Estimates based on the postwar data alone, however, are unstable, with variances which indicate substantial sampling uncertainty.
Consumption, Aggregate Wealth, and Expected Stock Returns
 THE JOURNAL OF FINANCE • VOL. LVI, NO. 3 • JUNE 2001
, 2001
"... This paper studies the role of fluctuations in the aggregate consumption–wealth ratio for predicting stock returns. Using U.S. quarterly stock market data, we find that these fluctuations in the consumption–wealth ratio are strong predictors of both real stock returns and excess returns over a Treas ..."
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Cited by 150 (18 self)
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This paper studies the role of fluctuations in the aggregate consumption–wealth ratio for predicting stock returns. Using U.S. quarterly stock market data, we find that these fluctuations in the consumption–wealth ratio are strong predictors of both real stock returns and excess returns over a Treasury bill rate. We also find that this variable is a better forecaster of future returns at short and intermediate horizons than is the dividend yield, the dividend payout ratio, and several other popular forecasting variables. Why should the consumption–wealth ratio forecast asset returns? We show that a wide class of optimal models of consumer behavior imply that the log consumption–aggregate wealth ~human capital plus asset holdings! ratio summarizes expected returns on aggregate wealth, or the market portfolio. Although this ratio is not observable, we provide assumptions under which its important predictive components for future asset returns may be expressed in terms of observable variables, namely in terms of consumption, asset holdings and labor income. The framework implies that these variables are cointegrated, and
Stochastic Trends and Economic Fluctuations
 American Economic Review
, 1991
"... Are business cycles mainly the result of permanent shocks to productivity? This paper uses a longrun restriction implied by a large class of realbusinesscycle modelsidentifying permanent productivity shocks as shocks to the common stochastic trend in output, consumption, and investmentto provid ..."
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Cited by 128 (3 self)
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Are business cycles mainly the result of permanent shocks to productivity? This paper uses a longrun restriction implied by a large class of realbusinesscycle modelsidentifying permanent productivity shocks as shocks to the common stochastic trend in output, consumption, and investmentto provide new evidence on this question. Econometric tests indicate that this commonstochastictrend / cointegration implication is consistent with postwar U.S. data. However, in systems with nominal variables, the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the businesscycle variability in output, consumption, and investment. (JEL E32, C32) A central, surprising, and controversial result of some current research on real business cycles is the claim that a common stochastic trendthe cumulative effect of permanent shocks to productivityunderlies the bulk of economic fluctuations. If confirmed, this finding would imply that many other forces have been relatively unimportant over historical business cycles, including the monetary and fiscal policy shocks stressed in traditional macroeconomic analysis. This paper shows that the hypothesis of a common stochastic productivity trend has a set of econometric implications that allows us to test for its presence, measure its importance, and extract estimates of its realized value. Applying these procedures to consumption, investment, and output for the postwar United States, we find results that both support and contradict this claim in the realbusinesscycle literature. The U.S. data are consis
Some Impossibility Theorems In Econometrics With Applications To Instrumental Variables, Dynamic Models And Cointegration
 Econometrica
, 1995
"... General characterizations of valid confidence sets and tests in problems which involve locally almost unidentified (LAU) parameters are provided and applied to several econometric models. Two types of inference problems are studied: (1) inference about parameters which are not identifiable on certai ..."
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Cited by 124 (16 self)
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General characterizations of valid confidence sets and tests in problems which involve locally almost unidentified (LAU) parameters are provided and applied to several econometric models. Two types of inference problems are studied: (1) inference about parameters which are not identifiable on certain subsets of the parameter space, and (2) inference about parameter transformations with singularities (discontinuities). When a LAU parameter or parametric function has an unbounded range, it is shown under general regularity conditions that any valid confidence set with level 1 \Gamma ff for this parameter should be unbounded with probability close to 1 \Gamma ff in the neighborhood of nonidentification subsets and should as well have a nonzero probability of being unbounded under any distribution compatible with the model: no valid confidence set which is bounded with probability one does exist. These properties hold even if "identifying restrictions" are imposed. Similar results also ob...
Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration
 Journal of Applied Econometrics
, 1999
"... This paper employs response surface regressions based on simulation experiments to calculate asymptotic distribution functions for the Johansentype likelihood ratio tests for cointegration. These are carried out in the context of the models recently proposed by Pesaran, Shin, and Smith (1997) that ..."
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Cited by 77 (3 self)
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This paper employs response surface regressions based on simulation experiments to calculate asymptotic distribution functions for the Johansentype likelihood ratio tests for cointegration. These are carried out in the context of the models recently proposed by Pesaran, Shin, and Smith (1997) that allow for the possibility of exogenous variables integrated of order one. The paper calculates critical values that are very much more accurate than those available previously. The principal contributions of the paper are a set of data files that contain estimated asymptotic quantiles obtained from response surface estimation and a computer program for utilizing them. This program, which is freely available via the Internet, can be used to calculate both asymptotic critical values and P values. JEL Classification Number: C22 Keywords: cointegration tests, Johansen tests, vector autoregressions, exogenous variables, response surfaces, critical values, approximate
Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption
 American Economic Review
, 2004
"... Both textbook economics and common sense teach us that the value of household wealth should be related to consumer spending. Early academic work by Franco Modigliani (1971) suggested that a dollar increase in wealth (holding � xed labor income) leads to an increase in consumer spending of about � ve ..."
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Cited by 61 (4 self)
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Both textbook economics and common sense teach us that the value of household wealth should be related to consumer spending. Early academic work by Franco Modigliani (1971) suggested that a dollar increase in wealth (holding � xed labor income) leads to an increase in consumer spending of about � ve cents. Since then, the socalled “wealth effect ” on consumption has increasingly crept into both mainstream and policy discussions of the macroeconomy. 1 Today, it is commonly presumed that signi �cant movements in wealth will be associated with movements in consumer spending, either contemporaneously or subsequently. Quantitative estimates of roughly the magnitude reported by Modigliani are routinely cited in
Does the TimeConsistency Problem Explain the Behavior of Inflation in the United States
 Journal of Monetary Economics
, 1999
"... This paper derives the restrictions imposed by Barro and Gordon�s theory of timeconsistent monetary policy on a bivariate timeseries model for in�ation and unemployment and tests those restrictions using quarterly US data from 1960 through 1997. The results show that the data are consistent with t ..."
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Cited by 55 (1 self)
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This paper derives the restrictions imposed by Barro and Gordon�s theory of timeconsistent monetary policy on a bivariate timeseries model for in�ation and unemployment and tests those restrictions using quarterly US data from 1960 through 1997. The results show that the data are consistent with the theory�s implications for the longrun behavior of the two variables, indicating that the theory can explain in�ation�s initial rise and subsequent fall over the past four decades. The results also suggest that the theory must be extended to account more fully for the shortrun dynamics that appear in the data. JEL: E31, E52, E61. 1.
Variable trends in economic time series
 J. Econom. Perspectives
, 1988
"... T he two most striking historical features of aggregate output are its sustained long run growth and its recurrent fluctuations around this growth path. Real per capita GNP, consumption and investment in the United States during the postwar era are plotted in Figure 1. Both growth and deviations fro ..."
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Cited by 51 (1 self)
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T he two most striking historical features of aggregate output are its sustained long run growth and its recurrent fluctuations around this growth path. Real per capita GNP, consumption and investment in the United States during the postwar era are plotted in Figure 1. Both growth and deviations from the growth trendoften referred to as "business cycles"are apparent in each series. Over horizons of a few years, these shorter cyclical swings can be pronounced; for example, the 1953, 1957 and 1974 recessions are evident as substantial temporary declines in aggregate activity. These cyclical fluctuations are, however, dwarfed in magnitude by the secular expansion of output. But just as there are cyclical swings in output, so too are there variations in the growth trend: growth in GNP in the 1960s was much stronger than it was in the 1950s. Thus, changes in long run patterns of growth are an important feature of postwar aggregate economic activity. In this article we discuss the implications of changing trends in macroeconomic data from two perspectives. The first perspective is that of a macroeconomist reassessing the conventional dichotomy between growth and stabilization policies. As an
A PANIC Attack on Unit Roots and Cointegration
, 2003
"... This paper develops a new methodology that makes use of the factor structure of large dimensional panels to understand the nature of nonstationarity in the data. We refer to it as PANIC – a ‘Panel Analysis of Nonstationarity in Idiosyncratic and Common components’. PANIC consists of univariate and ..."
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Cited by 47 (2 self)
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This paper develops a new methodology that makes use of the factor structure of large dimensional panels to understand the nature of nonstationarity in the data. We refer to it as PANIC – a ‘Panel Analysis of Nonstationarity in Idiosyncratic and Common components’. PANIC consists of univariate and panel tests with a number of novel features. It can detect whether the nonstationarity is pervasive, or variablespecific, or both. It tests the components of the data instead of the observed series. Inference is therefore more accurate when the components have different orders of integration. PANIC also permits the construction of valid panel tests even when crosssection correlation invalidates pooling of statistics constructed using the observed data. The key to PANIC is consistent estimation of the components even when the regressions are individually spurious. We provide a rigorous theory for estimation and inference. In Monte Carlo simulations, the tests have very good size and power. PANIC is applied to a panel of inflation series.