Cointegration for the Applied Economist.

• Author: Hassan, Seid Y.

This book comprises six chapters and five papers on unit roots and cointegration. Chapter 1 contains some background material that may facilitate the understanding of unit roots and cointegration by the reader. Rao also summarizes the steps of conducting unit roots and cointegration tests. The book is designed to serve the non-technical applied economist and for use by the undergraduate or graduate student interested in this field. I generally agree that the book is pedagogically useful and can serve the intended purpose. However, one cannot avoid raising questions about the usefulness of the book concerning its timing and the subject matter it covers. There are quite a few books already in print in this field that are easily readable to the average applied economist or student. Examples include books by Walter Enders, Applied Econometric Time Series (John Wiley & sons. Inc.), Cuthbertson et. al., Applied Econometric Techniques (The University of Michigan Press), and to some extent books by James Hamilton, Time Series Analysis (Princeton Univ. Press), Banerjee et. al., Cointegration, Error Correction, and the Econometric Analysis of Non-Stationary Data (Oxford University Press) etc. Moreover, even though some of the papers in the present book could be inaccessible to some readers, the same empirical applications of some of these papers are contained, in some form or another, in the textbooks just mentioned. Cases in point are the application of cointegration on the demand for money by Dicky, Jansen, and Thornton in Chapter 2 in this book, and Perron unit root tests [Chapter 4].

Chapter 2 presents the expository paper of Dickey, Jansen, and Thornton (1991) that appeared at the Federal Reserve Bank of St. Louis Review. This paper uses the three cointegration procedures, that of Engle-Granger, Johansen, and Stock-Watson. The authors explain the masons why and the methods of conducting unit root tests, and provide a general framework for conducting cointegration tests, the economic interpretation of cointegrating vectors, and discuss, in a step-by-step fashion, the salient features of these three alternative procedures to testing for cointegration. They use the demand for money in their application.

Chapter 3 presents the Holden-Perman paper titled "Unit Roots and Cointegration for the Economist," which is basically a non-technical review of unit roots and cointegration techniques. The authors explain in a step-by-step procedure: 1) the methods...