Dummy variable in cointegration analysis....

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mariusz doszyń

Tuesday, 4 October 2011 Tue, 4 Oct '11

8:39 p.m.

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Allin Cottrell

Tuesday, 4 October Tue, 4 Oct

8:59 p.m.

On Tue, 4 Oct 2011, mariusz doszyń wrote:

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I'd like to include a dummy variable to simple system of equations (with cointegration):1) delta_y[t]=a0+a1*y[t-1]+a2*x[t-1]+u[t], 2) delta_x[t]=b0+b1*y[t-1]+b2*x[t-1]+e[t]. The dummy variable d[t]=[1,0,1,1,1,0,0,...1,1,0,1,0,1], so it somethimes equals 1, sometimes 0, and generally it increases the level of y[t] variable in some periods (when d[t]=1). While using vecm command should I add d[t] or rather delta_d[t] (which is differenced d[t])? My intuition is that delta_d[t] should be added to avoid some kind of trend.

What you need to know about gretl's "vecm" command is that it will not automatically difference the dummy for you. Beyond that the model specification is up to you.

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Dummy variable should be added as a xlist or rxlist (where dummy is in a cointegration space)?

If you want to confine the dummy to the cointegration space (in which case it will not generate a trend, even if it's in levels form), then use rxlist, otherwise use xlist. From "help vecm": "The optional lists xlist and rxlist allow you to specify sets of exogenous variables which enter the model either unrestrictedly (xlist) or restricted to the cointegration space (rxlist). These lists are separated from ylist and from each other by semicolons." Allin Cottrell

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Allin Cottrell
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Dummy variable in cointegration analysis....