Bounds testing approaches to the analysis of level relationships

Journal of Applied EconometricsVolume 16, Issue 3 p. 289-326 Research Article Bounds testing approaches to the analysis of level relationships M. Hashem Pesaran, Corresponding Author M. Hashem Pesaran [email protected] Trinity College, Cambridge CB2 1TQ, UKFaculty of Economics and Politics, University of Cambridge, Sidgwick Avenue, Cambridge CB3 9DDSearch for more papers by this authorYongcheol Shin, Yongcheol Shin Department of Economics, University of Edinburgh, 50 George Square, Edinburgh EH8 9JY, UKSearch for more papers by this authorRichard J. Smith, Richard J. Smith Department of Economics, University of Bristol, 8 Woodland Road, Bristol BS8 1TN, UKSearch for more papers by this author M. Hashem Pesaran, Corresponding Author M. Hashem Pesaran [email protected] Trinity College, Cambridge CB2 1TQ, UKFaculty of Economics and Politics, University of Cambridge, Sidgwick Avenue, Cambridge CB3 9DDSearch for more papers by this authorYongcheol Shin, Yongcheol Shin Department of Economics, University of Edinburgh, 50 George Square, Edinburgh EH8 9JY, UKSearch for more papers by this authorRichard J. Smith, Richard J. Smith Department of Economics, University of Bristol, 8 Woodland Road, Bristol BS8 1TN, UKSearch for more papers by this author First published: 22 June 2001 https://doi.org/10.1002/jae.616Citations: 7,598Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Abstract This paper develops a new approach to the problem of testing the existence of a level relationship between a dependent variable and a set of regressors, when it is not known with certainty whether the underlying regressors are trend- or first-difference stationary. The proposed tests are based on standard F- and t-statistics used to test the significance of the lagged levels of the variables in a univariate equilibrium correction mechanism. The asymptotic distributions of these statistics are non-standard under the null hypothesis that there exists no level relationship, irrespective of whether the regressors are I(0) or I(1). Two sets of asymptotic critical values are provided: one when all regressors are purely I(1) and the other if they are all purely I(0). These two sets of critical values provide a band covering all possible classifications of the regressors into purely I(0), purely I(1) or mutually cointegrated. Accordingly, various bounds testing procedures are proposed. It is shown that the proposed tests are consistent, and their asymptotic distribution under the null and suitably defined local alternatives are derived. The empirical relevance of the bounds procedures is demonstrated by a re-examination of the earnings equation included in the UK Treasury macroeconometric model. Copyright © 2001 John Wiley & Sons, Ltd. Citing Literature Volume16, Issue3Special Issue: In Memory of John Denis Sargan 1924–1996: Studies in Empirical MacroeconometricsMay/June 2001Pages 289-326 RelatedInformation