Hi! I'm not very good at algebra, wich caues problems for me when reading econometric articles. Now, I'm reading the Rahbek and Mosconi (1998) paper on how to introduce exogenous variables in VEC models. I understand that I, in addition to the introduction of the stationary exogenous variables, also should include them in accumulated form in the cointegration space. Critical values for this can be found in Harbo et al. (1998). My question now is, that Rahbek and Mosconi seem to argue that one have to use the restricted trend version for the asymptotics to hold. At the same time, Herbo et al gives critical values for all models (trend specifications). What should I do?
You still haven't told me how you created the accumulated form? Still waiting!!
Sry. I just added/subtracted the stationary variables successively one after the other along the time series. Is that wrong?
No, it is not wrong as long as the variable is stationary. As you already know, there are several approaches to Johansen method. The first one is not to put any stationary variable in the cointegration space[CS] (I like this approach) and use critical values from Osterwald-Lenum. This is. sometimes called referred to the full- system approach. Here Johansen and Juselus (1992) added "change in log of oil prices" to avoid non-normality. later an outlier dummy was included. Note that all inclusions were not in CS.
Then, came Rahbek and Mosconi (9) and Harbo et al. (98), suggest that given weak exogeneity in the long-run and variable stationarity, we can allow the accumulated variable (proxied by change in world oil prices) to enter the CS in which case we use only trace test and critical values in Harbo et al. (98) Table 3. (note not Table 4). OR you can use those in Rahbek and Masconi (98). Note here that step-.dummy enters CS, whereas impulse dummy enters the VEC. For me, I will stay with the first approach and I will spend time finding a variable correlated with my CS variables including 'change in oil prices, the lags of it, step-dummies, outlier dummies outside the CS. Lars, it is thundering and lighting and raining so am going to bed!!
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