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Working Paper

Cointegration and Transformed Series

A large and growing literature is concerned with the theory, estimation, and applications of cointegrating vectors and associated error correction models. A cointegrated system is a set of time series that individually follow difference-stationary linear processes, but one or more linear combinations of the series do not require differencing to appear stationary. The stationary linear combinations indicate stable long-run relationships. Engle and Granger (1987) demonstrate the correspondence between cointegrated time series and error correction models: generating processes for cointegrated systems have error correction representations, and error correction models generate cointegrated series.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Hallman, Jeffrey. 1990. “Cointegration and Transformed Series.” Federal Reserve Bank of Cleveland, Working Paper No. 90-14.