A1667
Title: Symmetry and separability in two-country cointegrated vector autoregressive processes
Authors: Hans-Martin Krolzig - University of Kent (United Kingdom) [presenting]
Reinhold Heinlein - University of Keele (United Kingdom)
Abstract: Introducing a previous approach to time series econometrics, it is shown that the dynamics of symmetric linear possibly cointegrated two-country VAR models can be separated into two autonomous subsystems: the country averages and country differences, where the latter includes the exchange rate. Under symmetry, the cointegration rank of the two-country model is given by the sum of the two subsystems. The two economies are cotrending if the country-differences subsystem is stable. It is shown that separability carries over even under asymmetries in the form of difference in the size of the countries' economies, where asymptotically a small-open-economy separation into closed \'economique dominant and country-difference subsystems emerges. In the case of time-varying country weights, the two-country systems and the country-average-difference representation are no longer isomorphic, but it is the latter that should be considered structural. The possibility of recursive structural VECM representations under symmetry is also evaluated. The derived conditions for symmetry and separability are easily testable and applied to a nine-dimensional quarterly cointegrated VAR model for the US and Euro Area in the post-Bretton-Woods era. We find evidence for symmetry in the long-run and with regard to the exchange rate dynamics.
