EES 0836 Study Guide - Quiz Guide: Test Statistic, Purchasing Power Parity, Cointegration
27 May 2016
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As the restrictions become more complex or more numerous, it will eventually become impossible to satisfy them by renormalisation. After this point, if the restriction is not severe, then the cointegrating vectors will not change much upon imposing the restriction. A test statistic to test this hypothesis is given by where, 2(m) are the characteristic roots of the restricted model are the characteristic roots of the unrestricted model r is the number of non-zero characteristic roots in the unrestricted model, and m is the number of restrictions. A var was estimated with 12 lags on 189 observations. Ppp states that the equilibrium exchange rate between 2 countries is equal to the ratio of relative prices. A necessary and sufficient condition for ppp is that the log of the exchange rate between countries a and b, and the logs of the price levels in countries a and b be cointegrated with cointegrating vector.
