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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2002:3:
A Monte Carlo Study on the Pitfalls in Determining Deterministic Components in Cointegrating Models

Göran Hjelm () and Martin W Johansson ()

Abstract: In this paper we examine, by means of Monte Carlo simulation, the properties of the so called 'Pantula principle' for the simultaneous determination of rank and deterministic components in a vector error correction model. Examining the five models contained within the Johansen methodology, we find that the 'Pantula principle' is heavily biased towards choosing model 3 (unrestriced constant) when model 4 (restricted trend) is the true one. We suggest a modification that reduces this bias to an important extent

Keywords: Cointegration; Deterministic components; Monte Carlo simulation; (follow links to similar papers)

JEL-Codes: C15; C32; C52; (follow links to similar papers)

13 pages, February 5, 2002

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This paper is published as:
Hjelm, Göran and Martin W Johansson, (2005), 'A Monte Carlo Study on the Pitfalls in Determining Deterministic Components in Cointegrating Models', Journal of Macroeconomics, Vol. 27, No. 4, pages 691-703



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