Exogeneity in Error Correction Models

In the recent years, the study of cointegrated time series
and the use of error correction models have become extremely
popular in the econometric literature. This book provides an
analysis of the notion of (weak) exogeneity, which is
necessary to sustain valid inference in sub-systems, inthe
framework of error correction models (ECMs).
In many practical situations, the applied econometrician
wants to introduce "structure" on his/her model in order to
get economically meaningful coefficients. For thispurpose,
ECMs in structural form provide an appealing framework,
allowing the researcher to introduce (theoretically
motivated) identification restrictions on the long run
relationships. In this case, the validity of the inference
will depend on a number of conditions which are investigated
here. In particular,we point out that orthogonality tests,
often used to test for weak exogeneity or for general
misspecification, behave poorly in finite samples and are
often not very useful in cointegrated systems.