Fixed Bandwidth Asymptotics in Single EquationModels of Cointegration with an Application to MoneyDemand

This paper provides a new approach to testing cointegration parameters in a singleequationcointegration environment. The novelty is in improving over the well-knownheteroscedasticity and autocorrelation consistent (HAC) robust standard errors usingfixed bandwidth (fixed-b) asymptotic theory and adapting it to the cointegration environment.It is shown that the standard tests still have asymptotic distributions free ofserial correlation nuisance parameters regardless of the bandwidth or kernel used, evenif the regressors in the cointegration relationship are endogenous. Using asymptoticpower and finite sample size simulation experiments, a specific kernel and bandwidthchoice is recommended. Finite sample simulations comparing the size and power of thetest using the fixed-b asymptotics to some of the currently popular tests are performed.These simulations confirm that the well-known size distortion of the standard tests canbe greatly reduced. Finally, the newly developed test is employed to investigate thestandard money-demand relationship for US data.[...]