:: Volume 7, Issue 1 (Fall 2012) ::
J. Mon. Ec. 2012, 7(1): 87-118 Back to browse issues page
Implications of Cointegration for Forecasting: A Review and an Empirical Analysis
Seyed Mahdi Barakchian
Graduate School of Management and Economics, Sharif University of Technology
Abstract:   (2223 Views)

Cointegration has different theoretical implications for forecasting. Several empirical studies have compared the out of sample forecasting performance of cointegrted VECMs against unrestricted VARs in levels and in differences. The results of these studies have been generally mixed and inconclusive. This paper provides a comprehensive review over the subject, and also examines the effects of cointegration rank restrictions on forecasting performance of VAR models through conducting an empirical exercise in the framework of a new two-country (Canada-US) model. The results show that a VAR/DVAR model forecasts as well as the best cointegrated VAR model (and  even better). Therefore, it seems that using cointegration techniques does not pay a dividend.

JEL Classifications: C32, C51, C53

Keywords: Cointegration, Forecasting using VECX, Rank restrictions
Full-Text [PDF 473 kb]   (821 Downloads)    
Type of Study: Research | Subject: Monetary Economics
Received: 2014/04/29 | Accepted: 2014/04/29 | Published: 2014/04/29


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Volume 7, Issue 1 (Fall 2012) Back to browse issues page