View article

Since the work of Engle and Granger (1987) and Granger (1986), there has been a surge of interest in cointegration analyses of equilibrium relationships between non-stationary economic variables. While non-stationary economic series can wander widely through time, economic theory often suggests that specific sets of variables should obey certain long-run equilibrium constraints. If the individual economic series are stationary only after differ-encing but a linear combination of their levels is stationary, then the series are said to be cointegrated.

An approach to analyze cointegrated systems due to Johansen (1988, 1991) has received much attention recently. Johansen proposes a maximum likelihood (ML) method for estimating long-run equilibrium relationships or cointegrating vectors and derives likelihood ratio (LR) tests for cointegration in a Gaussian vector error correction model." Phillips (1991), examining …