Your Textbook So Far Considered Variables for Cointegration That Are

question 12

Essay

Your textbook so far considered variables for cointegration that are integrated of the same order. For example, the log of consumption and personal disposable income might both be I(1)variables, and the error correction term would be I(0), if consumption and personal disposable income were cointegrated.
(a)Do you think that it makes sense to test for cointegration between two variables if they are integrated of different orders? Explain.
(b)Would your answer change if you have three variables, two of which are I(1)while the third is I(0)? Can you think of an example in this case?

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Definitions:

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Predestination

The belief or doctrine that all events are predetermined by a divine will or fate, and humans have no real ability to alter their futures.

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A psychological state in which an individual holds something to be true, based on evidence, trust, or confidence, not requiring proof for acceptance.

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