I have questions about cointegration test.
I am doing cointegration test between two variables, Government Revenue and Expenditure. I use the Engle & Granger cointegration test, by following the steps from Walter Enders (2004) book "Applied Econometric Time Series".
Basically what I have done are the following:
1. Check each variable's order of integration --> I found that both variables are I(1).
2. Estimate the long run equation, and get the residual.
3. Check the property of residual --> I found that the residual is stationary. ( I used critical value from MacKinnon's - 1991, "Critical Values for Cointegration Tests")
4. Estimate the short run dynamic by Vector Error Correction Model --> I found that the Error Correction Terms are not significant.
My question is how should I interpret this result? Are the variables cointegrated?
By definition, two variables are cointegrated when linear combination of nonstationary variables is stationary. I have found that both variables are nonstationary - I(1), and the linear combination is stationary. So, my result basically satisfies the cointegration definition. However, the error correction terms from short run dynamic are not significant.
Is significance in error correction term also a necessary condition for cointegration?