Bounds testing: error correction and additional variables
Posted: Wed Jul 06, 2016 5:25 am
Dear all,
I estimated the following ARDL model and tested whether yt and x1t are cointegrated by means of bounds testing approach :
Δyt = β0 + Σ βiΔyt-i + ΣγjΔx1t-j + θ0yt-1 + θ1x1t-1 + et
Bounds testing indicates that yt and x1t are cointegrated. When I estimated the corresponding error correction model (ECM), the coefficient of the error correction term (ϕ) lies between -1 and 0 and is statistically significant.
Δyt = β0 + Σ βiΔyt-i + ΣγjΔx1t-j + ϕECTt-1 + et
where ECTt=yt-c0 -a1x1t - vt
However, when I introduce additional explanatory variables (z1 to z8) in the specification (ECM), the coefficient of the error correction term doesn't lie between -1 and 0 anymore.
The specification is now: Δyt = β0 + Σ βiΔyt-i + ΣγjΔx1t-j + ϕECTt-1+ΣρkΔzk + et
k=1 to 8
Does this mean that I should have introduced the additional explanatory variables at the beginning of the procedure (before bounds testing) already? Should I test whether yt and x1t are cointegrated while considering the additional explanatory variables as exogenous variables?
Thank you so much for your help.
Here are my results:
I estimated the following ARDL model and tested whether yt and x1t are cointegrated by means of bounds testing approach :
Δyt = β0 + Σ βiΔyt-i + ΣγjΔx1t-j + θ0yt-1 + θ1x1t-1 + et
Bounds testing indicates that yt and x1t are cointegrated. When I estimated the corresponding error correction model (ECM), the coefficient of the error correction term (ϕ) lies between -1 and 0 and is statistically significant.
Δyt = β0 + Σ βiΔyt-i + ΣγjΔx1t-j + ϕECTt-1 + et
where ECTt=yt-c0 -a1x1t - vt
However, when I introduce additional explanatory variables (z1 to z8) in the specification (ECM), the coefficient of the error correction term doesn't lie between -1 and 0 anymore.
The specification is now: Δyt = β0 + Σ βiΔyt-i + ΣγjΔx1t-j + ϕECTt-1+ΣρkΔzk + et
k=1 to 8
Does this mean that I should have introduced the additional explanatory variables at the beginning of the procedure (before bounds testing) already? Should I test whether yt and x1t are cointegrated while considering the additional explanatory variables as exogenous variables?
Thank you so much for your help.
Here are my results: