long-run exclusion and the determination of cointegrating rank: monte carlo evidence

this note investigates long-run exclusion in a cointegrated vector autoregressive (var) model from the viewpoint of finite-sample statistical inference. monte carlo experiments show that, in various circumstances, a mis-specified partial var model, which is justified by the existence of a long-run excluded variable, can lead to better finite-sample inference for cointegrating rank than a fully specified var model. implications of long-run exclusion for econometric modelling are then considered based on the monte carlo study.