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Exercise 4 Consider the following VAR in standard form Yt = Y113t-1123t-1+ Cyt Zt = 721Yt-17223t-1 + ezt where yt I(1) and z~. ~

Exercise 4 Consider the following VAR in standard form Yt = Y113t-1123t-1+ Cyt Zt = 721Yt-17223t-1 + ezt where yt I(1) and z~. ~ I(1) 1. Explain under what conditions the two processes are cointegrated. 2. How would you test for cointegration?

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1 The two processes are cointegrated if the rank of the matrix 11 12 y21 22 is ... blur-text-image

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