This book considers the econometric analysis of both stationary and non‐stationary processes, which may be linked by equilibrium relationships. It provides a wide‐ranging account of the main tools, techniques, models, concepts, and distributions involved in the modelling of integrated processes (i.e. those that accumulate the effects of past shocks). Since the focus is on equilibrium concepts, including co‐integration and error‐correction, the analysis begins with a discussion of the application of these concepts to stationary empirical models. Later chapters show how integrated processes can be reduced to this case by suitable transformations that take advantage of co‐integrating (equilibrium) relationships. The concepts of co‐integration and error‐correction models are shown to be fundamental in this modelling strategy. Practical modelling advice and empirical illustrations are provided. Knowledge of econometrics, statistics, and matrix algebra at the level of a final‐year undergraduate or first‐year graduate course in econometrics is sufficient for most of the book. Other mathematical tools are described as they arise.

Wald tests of restrictions on the coefficients of vector autoregressive (VAR) processes are known to have nonstandard asymptotic properties for 1(1) and cointegrated systems of variables. A simple device is proposed which guarantees that Wald tests have asymptotic x2-distributio~ls under general conditions. If the true generation process is a VAR(p) it is proposed to fit a VAK(p+-1) to t h e data and perform a Wald test on the coefficients of the first p lags only. The power properties of the modified tests are studied both analytically and nunierically by means of simple illustrative examples.

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