Instrumental Variables Estimation of Stationaryand Nonstationary Cointegrating Regressions

Instrumental variables estimation is classically employed to avoid simultaneousequations bias in a stable environment. Here we use it to improve upon ordinaryleast squares estimation of cointegrating regressions between nonstationaryand/or long memory stationary variables where the integration orders of regressorand disturbance sum to less than 1, as happens always for stationary regressors,and sometimes for mean-reverting nonstationary ones. Unlike in the classicalsituation, instruments can be correlated with disturbances and/or uncorrelated withregressors. The approach can also be used in traditional non-fractionalcointegrating relations. Various choices of instrument are proposed. Finite sampleperformance is examined.