Time-varying cointegration and the UK great ratios

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 18 April 2019

Staff Working Paper No. 789

By George Kapetanios, Stephen Millard, Katerina Petrova and Simon Price
We re-examine the great ratios associated with balanced growth models and ask whether they have remained constant over time. Having first looked at whether Kaldor’s stylised facts still apply to the UK data, we employ a nonparametric methodology that allows for slowly varying coefficients to estimate trends over time. We formally test for stable relationships in the great ratios with a new statistical test based on these nonparametric estimators designed to detect time varying cointegrating relationships. Small sample properties of the test are explored in a small Monte Carlo exercise. Generally, we find little evidence for cointegration when parameters are constant, but strong evidence when allowing for time variation. The implications are that in macroeconometric models (including DSGE models), provision should be made to explicitly facilitate such shifting long-run relationships.

PDFTime-varying cointegration and the UK great ratios

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