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A Simultaneous Equations Approach to Cointegrated Systems a Simultaneous Equations Approach to Cointegrated Systems

In this paper a linear transformation of the vector error correction model is suggested yielding a conventional system of simultaneous equations. Since in this system the reduced rank conditions occur as linear overidentifying restrictions, some inference procedures are simpliied considerably. For example, tests of hypotheses about the cointegration space, exogeneity tests, tests of cofeature constraints and the computation of common trends can be performed easily in the simultaneous equation framework. Moreover, our representation allows to construct simple two-stage and three-stage least-squares estimators which are shown to be asymptotically equivalent to the FIML estimator. The research for this paper was partly carried out within the Sonderforschungsbereich 373 at the Humboldt University Berlin. I am indebted to Peter Boswijk and Anders Warne for a number of helpful comments and valuable suggestions. Of course, all remaining errors are my own.