No. 3/2006
A GAUSSIAN IV ESTIMATOR OF
COINTEGRATING RELATIONS
Gunnar Bårdsen
Niels Haldrup
Abstract:
In static single equation cointegration regression models
the OLS estimator will have a non-standard distribution unless regressors
are
strictly exogenous. In the literature a number of estimators have been
suggested
to deal with this problem, especially by the use of semi-nonparametric
estimators. Theoretically ideal instruments can be defined to ensure
a limiting
Gaussian distribution of IV estimators, but unfortunately such instruments
are
unlikely to be found in real data. In the present paper we suggest an
IV estimator
where the Hodrick-Prescott filtered trends are used as instruments for
the regressors in cointegrating regressions. These instruments are almost
ideal
and simulations show that the IV estimator using such instruments alleviate
the endogeneity problem extremely well in both finite and large samples.
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