CFDP 1777

Inconsistent VAR Regression with Common Explosive Roots

Author(s): 

Publication Date: January 2011

Pages: 32

Abstract: 

Nielsen (2009) shows that vector autoregression is inconsistent when there are common explosive roots with geometric multiplicity greater than unity. This paper discusses that result, provides a co-explosive system extension and an illustrative example that helps to explain the finding, gives a consistent instrumental variable procedure, and reports some simulations. Some exact limit distribution theory is derived and a useful new reverse martingale central limit theorem is proved.

Keywords: 

Co-explosive behavior, Common roots, Endogeneity, Forward instrumentation, Geometric multiplicity, Reverse martingale

JEL Classification Codes:  C22

See CFP: 1383