Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 30: Applied Cointegration Analysis in the Mirror of Macroeconomic Theory

Paul Söderlind () and Anders Vredin ()
Additional contact information
Anders Vredin: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden

Abstract: Applied cointegration analysis has much to gain from strong links with economic theory. For example, the current generation of equilibrium macroeconomic models have simple predi tions for cointegrating vectors. These models also suggest that important information about the economic structure can be found in the short run dynamics, which most cointegration studies disregard. Simulations of a stochastic business cycle model show that tests of cointegrating vectors, forecasts, and variance decompositions based on long run assumptions can be sharpened by imposing even very simple economic restrictions.

Keywords: Cointegration; money demand; stochastic growth model

JEL-codes: C32; E32

25 pages, November 1994

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