Exogeneity in Error Correction Models

In the recent years, the study of cointegrated time series

and the use of error correction models have become extremely

popular in the econometric literature. This book provides an

analysis of the notion of (weak) exogeneity, which is

necessary to sustain valid inference in sub-systems, inthe

framework of error correction models (ECMs).

In many practical situations, the applied econometrician

wants to introduce "structure" on his/her model in order to

get economically meaningful coefficients. For thispurpose,

ECMs in structural form provide an appealing framework,

allowing the researcher to introduce (theoretically

motivated) identification restrictions on the long run

relationships. In this case, the validity of the inference

will depend on a number of conditions which are investigated

here. In particular,we point out that orthogonality tests,

often used to test for weak exogeneity or for general

misspecification, behave poorly in finite samples and are

often not very useful in cointegrated systems.