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).
KeywordsError Correction Model Conditional Model Error Correction Term Marginal Model Auxiliary Model
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