A study of cointegration models with applications

Abstract

This study estimates cointegration models by applying the Engle-Granger (1989) two-step estimation procedure, the Phillip-Ouliaris (1990) residual-based test and Johansen’s multivariate technique. The cointegration techniques are tested on the Raotbl3 data set, the World Economic Indicators data set and the UKpppuip data set using statistical software R. In the Raotbl3 data set, we test for cointegration between the consumption expenditure, and income and wealth variables. In the world economic indicators data set, we test for cointegration in three of Australia’s key economic indicators, whereas in the UKpppuip data set we test for the existence of long-run economic relationships in the United Kingdom’s purchasing power parity. The study finds the three techniques not to be consistent, that is, they do not lead to the same results. However, it recommends the use of Johansen’s method because it is able to detect more than one cointegrating relationship if present.