Bootstrap Inference in Cointegrating Regressions: Traditional and Self-Normalized Test Statistics

Traditional tests of hypotheses on the cointegrating vector are well known to suffer from severe size distortions in finite samples, especially when the data are characterized by large levels of endogeneity or error serial correlation. To address this issue, we combine a vector autoregressive (VAR) sieve bootstrap to construct critical values with a self-normalization approach that avoids direct estimation of long-run variance parameters when computing test statistics. To asymptotically justify this method, we prove bootstrap consistency for the self-normalized test statistics under mild conditions. In addition, the underlying bootstrap invariance principle allows us to prove bootstrap consistency also for traditional test statistics based on popular modified OLS estimators. Simulation results show that using bootstrap critical values instead of asymptotic critical values reduces size distortions associated with traditional test statistics considerably, but combining the VAR sieve bootstrap with self-normalization can lead to even less size distorted tests at the cost of only small power losses. We illustrate the usefulness of the VAR sieve bootstrap in empirical applications by analyzing the validity of the Fisher effect in 19 OECD countries.