Using gret l for Principles of Econometrics, 4th Edition

VECM: Australian and U. S. GDP

You have two difference stationary series that are cointegrated. Consequently, an error cor­rection model of the short-run dynamics can be estimated using least squares. A simple error

and the estimates

AaUst = 0.491706+—0.0987029et_ 1

(8.491) (-2.077)

Ausat = 0.509884 ++0.0302501et_ 1

(10.924) (0.790)

(t-statistics in parentheses)

which are produced using

1 ols diff(aus) const uhat(-1)

2 ols diff(usa) const uhat(-1)

The significant negative coefficient on et-1 indicates that Australian GDP responds to a temporary disequilibrium between the U. S. and Australia.

The U. S. does not appear to respond to a disequilibrium between the two economies; the t-ratio on et-1 is insignificant. These results support the idea that economic conditions in Australia depend on those in the U. S. more than conditions in the U. S. depend on Australia. In a simple model of two economy trade, the U. S. is a large closed economy and Australia is a small open economy.