Re: [Gretl-users] Cointegration with Gretl -Suggestions!
Thank you very much Jack!
Jack:
In my view, data analysis is more akin to a craft than to science, so
"recipes" are something I generally dislike.
I agree.
However, a general strategy for estimating VECMs that I would
personally
consider sensible could follow these steps:
1) A cointegrated VAR (ie a VECM) is nothing but a VAR with nonlinear
restrictions; therefore, an unrestricted VAR is a perfectly valid model.
The
only thing you miss is using the additional information coming from the
restrictions on the rank of A(1), ie cointegration rank and long-run
equilibrium conditions. Clearly, these are often the things you're most
interestd in, but still the general VAR setup (lags, deterministic
components)
can be decided on the basis of the unrestricted VAR result and a pinch of
economic reasoning.
Again, I tottaly agree with you Jack.
The main problem is to determine "well" the wright cointegration rank and
this is close related and very sensitive to number of lags!
I'm giving a suggestion. Listen carefully-as you said a VECM is a VAR VAR
with nonlinear restrictions. This is well solved in PcGive. When selecting
data which enter in VAR ( which will be the basis to determine the number of
cointegration rank for future VECM) you can choose if constant and trend
will be unrestricted or restricted i.e. exogenous. This means that you can
enter (in a VAR model) constant as unrestricted but also as exogenous. This
stays for trend too.
So, you are getting Johansen cases:
Const, Trend - all as restricted
Const - unrestricted, Trend - restricted
Const - restricted, Trend - unrestricted etc.
After such estimation in which you can determine the constant and trend to
be unrestricted or not you procede with usual VAR model and usual testings.
This results are then applyed for VECM estimation.
So, I think that it will till be a great option to have a possibility to
determine constant and trend as unrestricted or restricted.
What do you think?
This will be a perfect feature. Plus, very proffesional.
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