A study of cointegration models with applications

Abstract

This study estimates cointegration models by applying the Engle-Granger (1989) two-step estimation procedure, the Phillip-Ouliaris (1990) residual-based test and Johansen’s multivariate \ntechnique. The cointegration techniques are tested on the Raotbl3 data set, the World Economic \nIndicators data set and the UKpppuip data set using statistical software R. In the Raotbl3 data \nset, we test for cointegration between the consumption expenditure, and income and wealth variables. In the world economic indicators data set, we test for cointegration in three of Australia’s \nkey economic indicators, whereas in the UKpppuip data set we test for the existence of long-run \neconomic relationships in the United Kingdom’s purchasing power parity. The study finds the \nthree techniques not to be consistent, that is, they do not lead to the same results. However, it \nrecommends the use of Johansen’s method because it is able to detect more than one cointegrating \nrelationship if present.

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