Your textbook states that there "are three ways to decide if two variables can plausibly be
modeled as cointegrated: use expert knowledge and economic theory, graph the series
and see whether they appear to have a common stochastic trend, and perform statistical
tests for cointegration.All three ways should be used in practice." Accordingly you set
out to check whether (the log of)consumption and (the log of)personal disposable
income are cointegrated.You collect data for the sample period 1962:I to 1995:IV and
plot the two variables. (a)Using the first two methods to examine the series for cointegration, what do you think the
likely answer is?

Question

Your textbook states that there "are three ways to decide if two variables can plausibly be
modeled as cointegrated: use expert knowledge and economic theory, graph the series
and see whether they appear to have a common stochastic trend, and perform statistical
tests for cointegration.All three ways should be used in practice." Accordingly you set
out to check whether (the log of)consumption and (the log of)personal disposable
income are cointegrated.You collect data for the sample period 1962:I to 1995:IV and
plot the two variables.  (a)Using the first two methods to examine the series for cointegration, what do you think the
likely answer is?

Quizplus · Accepted Answer

The Answer of Your textbook states that there "are three ways to decide if two variables can plausibly be
modeled as cointegrated: use expert knowledge and economic theory, graph the series
and see whether they appear to have a common stochastic trend, and perform statistical
tests for cointegration.All three ways should be used in practice." Accordingly you set
out to check whether (the log of)consumption and (the log of)personal disposable
income are cointegrated.You collect data for the sample period 1962:I to 1995:IV and
plot the two variables.  (a)Using the first two methods to examine the series for cointegration, what do you think the
likely answer is?

Your Textbook States That There "Are Three Ways to Decide