Weak Exogeneity in Error Correction Models
As has been pointed out in the previous chapter, the choice between a full system approach and a sub-system approach is not clear cut in the case of cointegrated systems. Both have advantages and defects. Conditional sub-systems, in particular, necessitate exogeneity assumptions which, if not fulfilled, may induce loss of efficiency and consistency -as in the usual stationary framework- but in the case of cointegrated systems also imply a loss of the mixed normal limiting distribution of the cointegrating vector estimators necessitating therefore semi-parametric corrections, model augmentation or two-step approaches (see Phillips and Hansen, 1990, Phillips, 1991, Phillips and Loretan, 1991, Saikkonen, 1991, Stock and Watson, 1991, Boswijk, 1992a,b).
KeywordsCovariance Income Autocorrelation Allo OECD
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