Detecting Long Memory Co-Movements in Macroeconomic Time Series

Abstract

Co-integration analysis tests for the existence of a significant long-run equilibrium among some economic variables. Standard econometric procedures to test for co-integration have proven unreliable when the long-run relation among the variables is characterized by non-linearities and persistent fluctuations around the equilibrium. As a consequence, many intuitive economic relations are empirically rejected. In this paper we propose a simple approach to account for non-linearities in the co-integrating equilibrium and possible long memory fluctuations from such equilibrium. We show that our correction allows us to test robustly for the presence of co-integration both under the null and alternative hypotheses. We apply our procedure to the Johansen-Juselius PPP-UIP database, and unlike the standard case, we do not fail to reject the null of no cointegration.

Keywords: Cointegration analysis, long memory

JEL Classification: C22, C51