DIRECT COINTEGRATION TESTING IN ERROR-CORRECTION MODELS

An error correction model is specified having only exact identified pa rameters, some of which reflect a possible departure from a cointegrat ion model. Wald, likelihood ratio, and Lagrange multiplier statistics are derived to test for the significance of these parameters. The cons truction of the Wald statistic only involves linear regression, and un der certain conditions the limiting distribution of the Wald statistic differs from the limiting distributions of the likelihood ratio and L agrange multiplier statistics. A special ordering of the variables is recommended so that equal limiting distributions of the three differen t test statistics are obtained. The applicability of the derived testi ng procedures is illustrated using real demand for money, real GNP, an d bond and deposit interest rates from Denmark.