Time Varying Cointegration and the UK Great Ratios

Seminar abstract

We re-examine the great ratios associated with balanced growth models and ask whether they remain constant over time.

We first use a benchmark DSGE model to explore how plausible smooth variations in structural parameters lead to movement in great ratios that are comparable to those seen in the UK data.

We then employ a non-parametric methodology that allows for slowly varying coefficients to estimate trends over time. To formally test for stabler relationships in the great ratios, we propose a statistical test based on these non-parametric estimators devised to detect time varying cointegrating relationships.

Small sample properties of the test are explored in a small Monte Carlo exercise.

Generally, we find no evidence for cointegration when parameters are constant, but strong evidence when allowing for time variation.

The implications are that in macroeconometric models allowance should be made for shifting long-run relationships, including DSGE models where smooth variation should be allowed in deep structural relationships.

Booking

This is an open event. Please feel free to bring your colleagues, classmates and friends along.

Speaker bio

Professor Simon Price joined the Essex Finance Centre at the Essex Business School in January 2016. Prior to that, he was a Senior Technical Adviser with special responsibility for coordinating research activities in Monetary Analysis at the Bank of England. Simon was also an honorary professor at City University, London.

Simon is a member of the Money Macro and Finance Research Group Committee and a Research Associate at the Centre for Macroeconomic (London) and the Centre for Applied Macroeconomics (ANU).

Before he joined the Bank of England in 2001, Simon had a full time chair at City. He has worked mainly in universities, including posts at the University of Bristol and the University of Essex, in Economics where he gained his PhD. Simon spent two years at HMT as well as working as a consultant on a range of issues, for example on behalf of Oxford Economic Forecasting and NERA.

Simon has published in a variety of policy-related finance and macroeconomic areas. Examples of this include papers on;

• aggregate and firm level investment behaviour 
• price setting
• predictability of asset returns
• point and density forecasting.

Simon has also worked on elections and voting behaviour, sometimes in collaboration with political scientists. 

His current research focus is predominantly on forecasting most recently on forecasting in the presence of structural change and forecast density combination.