December 1999

A Simple Approach to Robust Inference in a Cointegrating System

Jonathan H. Wright


Cointegration requires all the variables in the system to have exact unit roots; accordingly it is conventional for researchers to test for a unit root in each variable prior to a cointegration analysis. Unfortunately, these unit root tests are not powerful. Meanwhile, conventional cointegration methods are not at all robust to slight violations of the requirement that each variable have a unit root. In this paper I show how this difficulty may be circumvented by instrumenting the regressors in the cointegrating regression by deterministic polynomial time trends or by artificially generated random walks.

Keywords: Cointegration, Local to Unit Roots, Robustness, Instrumental Variables

PDF: Full Paper

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