Intermediate Econometrics - 5QQMN938

Dr Jack Fosten

Tutorial 8: Cointegration
Question 1 (Computer)
Consider the dataset “EUEmpData.xlsx” used last week and in the lecture. We will use the
dataset to replicate the results about (non-)cointegration in Italian female and male
unemployment, both over the full sample and over the last decade.
a) Import the data, prepare it as usual and graph the series of male and female
unemployment (FemaleItaly/MaleItaly) only on data before 2020.
b) Assuming that male/female unemployment are I(1) processes (check this if you like),
let’s first run through the Engle-Granger procedure by hand:
i. Run the long-run regression of female on male unemployment using regress
ii. Save the residuals using “predict res, res”. Graph them – what do you
think about cointegration versus non-cointegration of these series?
iii. Run an ADF test on the residuals with no constant using “dfuller” command
with the option “noconstant” (we did not use this last time but it is required for
testing the residuals). Select the lag length with the sequential t-testing
procedure.
iv. Run the test for cointegration by finding the test statistic and appropriate critical
value. What do you find? How do you interpret the result?
c) Now install the egranger command (Help->Search-> “egranger” and click install). Use
the egranger command to perform the same test for cointegration and verify you get
the same results.
d) Repeat this analysis restricting the sample to the most recent decade 2010-2020 only
(see if you can get the syntax right based on those in the do file. Hint: use & to add
another if condition). Verify the results in the lecture. You can also try running the
Discuss

error correction model.

Question 2 (Computer)
Now choose another country from the dataset, graph the total unemployment rate and the rate
broken down by male and female. Check for cointegration between the male and female
unemployment rate. Is there a meaningful long-run equilibrium between these series?

Question 3 (Problem)
a) 🎥 Consider the ADL(1,1) model discussed in Lecture 5 for the stationary variable
case:

𝑌𝑡 = 𝛽0 + 𝛽1 𝑋𝑡 + 𝛽2 𝑋𝑡−1 + 𝜙1 𝑌𝑡−1 + 𝑣𝑡

Now assuming that 𝑌𝑡 and 𝑋𝑡 are both 𝐼(1) processes, derive the Engle-Granger error
correction model:
 Δ𝑌𝑡 = 𝛽1 Δ𝑋𝑡 + 𝜌(𝑌𝑡−1 − 𝛼 − 𝛽𝑋𝑡−1 ) + 𝑣𝑡

by manipulating the ADL(1,1) model and work out the values of 𝜌, 𝛼 and 𝛽 in terms of
the original parameters 𝛽0 , 𝛽1 , 𝛽2 .
b) A researcher finds out that three series 𝑌𝑡 , 𝑋𝑡 and 𝑍𝑡 are I(1) processes using a large
sample of data. They run a regression of 𝑌𝑡 on the other two variables, save the
residuals and run the following Dickey-Fuller test on the residuals:

Δ𝑢̂𝑡 = − 0.4 𝑢̂𝑡−1 + 𝑙𝑎𝑔𝑠

(0.11)

where standard errors are in brackets. Do they have evidence that 𝑌𝑡 is cointegrated
with 𝑋𝑡 and 𝑍𝑡 ?

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