Seasonal Cointegration in Macroeconomic Systems: Case Studies for Small and Large European

Countries
Author(s): Robert M. Kunst
Source: The Review of Economics and Statistics, Vol. 75, No. 2, (May, 1993), pp. 325-330
Published by: The MIT Press
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NOTES

325

SEASONAL COINTEGRATION IN MACROECONOMIC SYSTEMS:

CASE STUDIES FOR SMALL AND LARGE EUROPEAN COUNTRIES
Robert M. Kunst*
Abstract-Stochastic seasonality in vector autoregressions
drawsattentionto seasonalcointegratingvectors.Based upon
the assumptionof stochasticseasonality,seasonal cointegration is found in a six-dimensionalVAR of quarterlymacroeconomicseries whichwere not seasonallyadjusted.The same
experimentis performedon paralleldata fromfour European
economies:Austria,Finland,Germany,and the United Kingdom. Univariateand multivariatestatisticalevidencesupports
stochasticseasonalityin Finlandand Germanywhereasdeterministiccycles dominatein Austriaand the United Kingdom.
Eventualcorrespondencesof seasonalstructuresacrosscountries are also analyzed.
I.

Introduction

The strong seasonal patterns in many raw (nonadjusted) quarterly economic time series invalidate the
assumption of stationary first differences. The question
whether to eliminate these seasonal patterns by regression on seasonal dummies ("deterministic" model) or
to treat them by seasonal differencing, assuming additional unit roots on the unit circle ("stochastic" model),
parallels the discussion of deterministic versus stochastic trend models.
This discrimination becomes even more important
when several series are treated together in a vector
autoregression (VAR). If the stochastic model holds,
seasonal cointegration (SC) deserves attention, a
feature analogous to cointegration (see Engle
and Granger, 1987). SC has been introduced by Engle,
Granger, and Hallman (1989) and Hylleberg, Engle,
Granger, and Yoo (1990, HEGY). SC means that,
although individual series display stochastic seasonality
reflected by unit roots (e.g., at -1 for semi-annual
cycles or frequency v), there is a linear combination
which is free from that kind of seasonality but might
yet have unit roots at 1 or at other seasonal frequencies (e.g., vr/2 or annual cycles). Theory has it that
non-cointegration at seasonal frequencies is equivalent
to rank restrictions which would make SC the typical
feature. However, empirical evidence on SC has been
rather scarce so far (compare Engle et al., 1993).
Receivedfor publicationApril 24, 1991. Revisionaccepted
for publicationDecember17, 1991.
* Institutefor AdvancedStudies.
The author would like to thank S0ren Johansen, Marius
Ooms, Pierre Siklos, and the referees for helpful comments
on previous versions of this paper. He also thanks Klaus
Neusser for the Germandata and the basic selection of the
economic variables, and once more Pierre Siklos for the
algorithmfor the SC analysis.
Copyright? 1993

All series which do not have seasonalunit roots are

triviallycointegratedas the correspondingunit vectors
cointegrate.Moreover,absenceof SC entailsthat there
are as many sources of seasonalityas series, which is
counter-intuitiveif residualsfrom definitionalrelations
are non-seasonal-such as output minus consumption
minusinvestment.Hence, SC shouldnot be uncommon
in larger systems-whereas perhaps harder to find in
two-variablerelations.
This paper searchesfor SC structuresin macroeconomic VARs known to cointegrateat frequencyzero
and investigates whether such structures are stable
across countries. In detail, data from four European
economies(Austria,Finland,Federal Republicof Germany, United Kingdom)are used, six quarterlyseries
for each economy:gross domestic(or national)product
Y; private consumptionC; gross fixed investment I;
goods (if unavailable,total) exports X; real interest
rate on bonds R; real wage W (per capita wages
deflated by the Y deflator). This system has been
adopted from Kunst and Neusser (1990) who motivate
their specificationby the fact that neoclassicalgrowth
theory imposes several steady-state relations among
the variables.Hence, the systemprovidesan appropriate startingpoint for investigatingmultivariatecointegrationin an internationalcomparison.
The four national accountsseries Y, C, I, X are in
constantprices, so the systemis in real terms. Sample
periods are as follows: Austria 1964-1990, Finland
1972-1988, Germany 1960-1988, United Kingdom
1963-1988. Results on the Finnish data may suffer
from low test power,as this sampleis rathersmall.All
series except R are in logarithms.Data sources are
DIW (Germany),the databaseof the AustrianInstitute
for EconomicResearch, and the OECD quarterlynational accounts database. Detailed data are available
upon requestfrom the author.
Not only is the nature of seasonal structures of
considerable intrinsic interest; it also has profound
implications for economic short-run modeling and
forecasting. SC invalidates some popular modeling
strategies:individual seasonal adjustmentby Census
X-11; individualseasonalfilteringby four-quartermoving averages;VAR modeling with seasonal dummies
included. Eventual misspecificationof seasonalitycan
severely influence the evidence on cointegration at
zero frequency.The effects of seasonal adjustmenton
estimation and testing of cointegrationstructuresare
an open field for research. Jaeger and Kunst (1990)

THE REVIEW OF ECONOMICS AND STATISTICS

326

have established strong effects of Census X-11 on

univariatemeasuresof persistence.The consequences
for multivariateanalysis may be even more troublesome.
The paperis organizedas follows.Section II reviews
the stochasticand the deterministicmodel of seasonality and deals with univariatepropertiesof the data. In
section III, SC structuresin the multivariatesystems
are identifiedand analyzed.Section IV concludes.
II. Univariate Characteristics of the Data Series

The traditionalview of seasonalityis that raw quarterly series can be decomposedinto a possiblydeterministic seasonal component and into a remainder
comprising"trend"and "cycles."Any furthermodeling concernsthe residualwhich is tacitly assumed to
containall economicallyrelevantinformation.
This approachparallels the classic solution to the
detrendingproblem.With respect to seasonality,however, componentsmodelinghas advancedfurtherand,
in many countries for many variables,raw series are
not even available. All seasonal information is destroyed carefully by specialists of statistical offices,
often on a low level of aggregation,who usuallybase
this "seasonaladjustment"on Census X-11 or similar
procedures.Only recently, interest in raw series has
increased. Within Europe, the availabilityof unadjusted series has confined this investigationto four
countries.
Once original data are available,many researchers
use simple deterministics,such as quarterlydummies,
togetherwith lineartime series analysison the stochastic part of the process or system. Accepting the unit
root trend model, this deterministicseasonal model
becomes
F(B)AXt

E aiDit + O(B)Et.
i=l

A4Xt = dt +

The two models generate differentseasonal behavior. (1) describesa series governedby four alternating
linear trendswith identicalslopes. The "average"sea*
1,
sonal patternremainsconstant.With I'(D)
(-)
(2) yields four circularlymerged random walks with
identical drift, implyingpersistentchanges in the seasonal patternalthoughthe best predictionof its future
shape is alwaysits present one.
Whereas, with respect to detrending, analysts of
macroeconomic series have been preferring the
stochastic unit root model since discriminatorytests
have been made available,a similar"revolution"did
not occur with respect to seasonality.One reason is
that reported evidence is mixed. Many authors, e.g.,
Ghysels(1990), Miron (1990), Franses (1991), support
the dummymodel; Osborn(1990), however,finds seasonal unit roots in some U.K. series and Lee and Siklos
(1991) even detect them in seasonallyadjustedCanadian data. Changingseasonal patterns are evident in
some of the series under investigation.
Moreover,the basic model (D( ) - ( ) 1, started
from a flat seasonal pattern, generates too many
changesin seasonality,"summerbecomingwinter"too
easily. However, if the interquarterlycorrelation of
annual growth rates is properlyaccounted for and a
highly volatile starting pattern is used, few summer
peaks will turn into winter peaks in simulations.One
shouldnot be too reluctant,anyway,to attachnon-zero
probability,e.g., to the event of shiftingthe main feast
from Christmasto summersolstice after a time span of
one or two centuries.
The seasonal models can be discriminatedby tests
developed by HEGY. HEGY show that any autoregressivestructurewith deterministiccomponentdt can
be representedas

(1)

E aiYi,t-1 +
i=1

E biA4Xt-i

+ Et

(3)

i=1

Under the null hypothesisof stochasticseasonality,all

ai are zero. The Yi t are obtainedfrom Xt via the filter

(1) recallsthe modelingof trendingbehaviorvia linear factors (1 + B)(1 + B2), (1 - BX1 + B2), B(1 - B)
functionsof time. The seasonal counterpartof differ- (1 + B) and (1 - BX1 + B). Each rejection of a zero
encing trending processes is seasonal differencing restrictionhas its own interpretation.If only a1 # 0,
(A4 = 1 - B4):
(1 + B)(1 + B2) still divides the 1(D) polynomialbut
there will not be a unit root at one. Similarly,a2 # 0
=
+
b
(2)
D(B)A4Xt
O(B)Et.
indicates absence of the semi-annualcycle and of the
If Xt is in logarithms, A4Xt represents an annual root -1, whereasboth a3 and a4 relate to the annual
growthrate. The filter A4 consistsof the factors1 - B cycle with the complexroots ?i. The tests parallelthe
and 1 + B + B2 + B3, the former one removingthe test by Dickey and Fuller (1979) which discriminates
trend and the latter one removingall seasonal struc- between the deterministicand stochastictrend model.
ture. (2) belongs to the SARIMA (seasonal integrated HEGY give significancepoints for various combinaARMA) class defined by Box and Jenkins(1976). Ac- tions of deterministicsincludedin (3). If dt comprises
cording to HEGY, the process is "integratedat the seasonal dummiesand a linear trend, all deterministic
frequencies0, i,-/2, il-," as these are the frequenciesof alternativesof seasonalityand trendsare encompassed.
the spectralpoles impliedby unit roots at + 1, i, -1,
All interestingtest specificationswere applied to the
i.e., the roots of the A4 operator.
24 data series.

NOTES
These HEGY tests were unable to reject unit roots
for most series.1Evidence againststochasticseasonality is strongestin the United Kingdomwhere only C
passed the test. In contrast,most German series display stochasticseasonal cycles. R is seasonal as it has
been deflated via the GDP deflator. In the United
Kingdom, R is non-seasonal due to a non-seasonal
deflator.Non-robustnessof this result with respect to
the inclusion of seasonal dummies directly indicates
deterministic seasonality. Fixed cycles dominate in
I-climatic reasons impair constructioninvestmentin
winter-and also in British GDP. In the remaining
series, seasonality appears to be either absent or
stochastic.
Additionally,conventionalunit root tests have been
conductedon the original,the seasonallyadjusted,and
the differencedseries. In summary,first-orderintegration at frequency zero is consistent with all series
exceptfor GermanR whichmaybe stationary,whereas
higher-orderintegrationis not supported.
In some series, particularlythe Finnishinterest rate
and most U.K. variables,significantleptokurtosisoccurredwhich could affect all test proceduresreported
in this paper. The influence of the failure of moment
conditionson unit root tests has been highlightedby
Phillips (1990). Retaining moment conditions, leptokurtosistends to bias the size of the reportedstatistics downwardin finite samples.

the system, both at the semi-annualand the annual

frequency.
The Ai admitinterpretationsanalogousto the zerofrequencycase treatedby Johansen(1988). If A2 has a
rank deficiency,it can be represented as a2i'. The
columns of f62 contain vectors which remove the root
at -1 from the resultingseries. ,' X, trends but does
is stanot exhibitsemi-annualseasonalitywhile 3'2Y2t
tionary. Hence, the columns of /62 cointegrate at
frequencyvr.The columnsof f63 in A3 = a3f3'3cointegrate at frequency vr/2 if A4 0.2 If A4 # O, "dynamic cointegrationvectors" (see Engle et al., 1993)
can complicatethe analysis.
estimates
Lee (1992)showsthat maximum-likelihood
of pi (i = 1,2,3) are obtained from the canonical
vectors on Yi 1t- with respect to A4Xt corresponding
to the non-zero canonicalroots. Canonicalanalysisis
performed conditional on the other Y1,t-l elements
(e.g., the Y1,t- to A4Xt correlationsare calculated
conditionalon Y2,t-1, Y3,t-1 Y4,t-1) and on p lags of
A4Xt. In the variant used for this paper, p3 was
estimated under the assumption A4 = 0, thus only
"static"SC vectorswere admitted.The algorithmgeneralizes Johansen's(1988) cointegrationprocedureto
the seasonalcase.
The rank of Ai is determined by likelihood-ratio
(LR) statisticswhich are cumulatedsums
=

LRi(k) =-T

In univariate analysis, working with adjusted data

can be compatiblewith (2) as many seasonal adjustment filtersimplicitlyassume seasonal unit roots. This
reconciliationof (2) with seasonal adjustment,however, breaks down in a multivariateframeworkdue
to SC.
A solution to the (Gaussian) maximumlikelihood
problemwith SC restrictionson seasonallyintegrated
variables is due to Lee (1992). It applies the transformedrepresentation(3) to an n-dimensionalVAR.
4

EAiYi,1+

E riA4Xti

i=l

+Et-

(4)

i=l

The vectors Yit (i = 1, . . ., 4) correspond to the scalar

variablesof the univariateHEGY test. If A2 = A3 =

A4 = 0, (4) reduces to the usual cointegrated VAR
with the "impactmatrix"A1 = an'. Only in this case,
(1 '+ BX1 + B2) cancels from the lag polynomialand
an applicationof this filter to all individualseries and
VAR modelingof the filtered data is acceptable.This
assumesn independentsourcesof seasonalbehaviorin
1All test results mentioned are availableon request from

the author.

log(1

ri)

(5)

j=n-k+1

III. Multivariate Cointegration Analysis

A4Xt=,+

327

over the k smallestcanonicalroots of the corresponding problem. Under the null hypothesis, k roots are
zero. If LRi(k) becomes significant,rn-k+ 1 is taken to
be non-zeroand rank Ai > n-k. Lee (1992)gives the
distributionof LRi(k) in homogeneous systems. Although intercepts change significancepoints in finite
samples, these modificationsonly entail importanteffects for LRj(k) (see Johansen and Juselius, 1990).
Constantsgenerate linear trends in Y1t but not in the
seasonalvariatesYit,i > 1.
For LR2(k) and LR3(k), Lee's fractilestables were
extended to higher dimensions by simulation. For
LR,(k), table Al of Johansen and Juseliuswas used.
GAUSS programcodes by Siklos (1989, 1990) helped
to simplifythe calculations.Table 1 gives LR statistics
for the four six-variablecountrysystems.Values significant at approximately5% are in bold face. For all
countries,evidence on SC is substantialand comparable to that on frequency-zerocointegration.
Lag orders were specified by Akaike's Information
CriterionAIC. Althoughinformationcriteriashouldbe
applied with care for VARs (Nickelsburg,1985), the
2One could also restrict A3 = 0 and investigatecointegration by A4. The choice A4 = 0 amounts to preferringsynchronousseasonalcycles to those with a phase shift.

328

THE REVIEW OF ECONOMICS AND STATISTICS

TABLE 1.-SEASONAL COINTEGRATIONTEST LR STATISTICS

Frequency

Austria
(p = 0)

Finland
(p = 0)

Germany
(p = 1)

United Kingdom
(p = 0)

Co=
Co=
Co=
co =
Co=
co =
co =
Co=
Co=
co =
Co=
Co=
co =
Co=
co =
co =
co =
Co=

220.190
124.143
144.190
105.971
79.584
70.567
59.897
53.216
32.884
30.530
31.067
14.043
9.370
11.279
5.355
2.283
0.184
0.701

105.001
100.291
120.317
63.094
61.811
72.436
38.433
35.549
43.267
17.397
19.461
24.261
4.013
6.590
8.252
0.580
0.085
0.216

121.237
97.432
111.200
72.065
46.637
44.132
42.933
22.410
22.677
24.883
10.392
9.947
8.282
4.970
1.275
2.631
0.254
0.086

100.949
141.645
171.860
61.463
96.749
92.792
27.701
53.082
59.538
12.816
23.251
30.662
5.371
11.063
10.241
0.725
2.727
2.859

0
7r
v/2
0
7r
v/2
0
7r
v/2
0
7r
v/2
0
7r
v/2
0
7r
v/2

Rank
0
1
2
3
4
5

Note: "Rank" indicates the rank of the Ai matrix (A1 in the first line of each block etc.) which is tested for.
Rejection of "rank A2 = 0," e.g., means there is (at least) one vector cointegrating at 7r. Values significant at
approximately 5% are in boldface.

quest for parsimonysuggestsAIC in a situationwhere

none of the lag orders can be regardedas the correct
one. All models left substantialresidual autocorrelation in at least one of the residuals. Parsimonious
models are justified as too many conditioninglags in
the VAR would distort the evidence on cointegrating
structures.AIC on VARs in levels recommendedlag
orders 3, 1, 5, 4 for the four economies. Hence, only
for Germany,one lag of A4X1was includedin (4).
An approximate5% risk level supportsfour cointegratingvectors at ir for Austria, two for Finland,one
for Germany,and three for the United Kingdom.At
vr/2, the outcome is similar:two for Austria,three for
Finland, one for Germany,four for the United Kingdom. As theorybackstwo SC vectors-one unit vector
for non-seasonal X and one relating seasonalityin Y
to C and I-the followingcross-countrycomparisons
assumetwo vectorsfor each country.
Let vi, i = 1, . . ., 6 denote the canonicalvectors at
the semi-annualfrequency,with v1 correspondingto
the largest root and V6 to the smallest one. Table 2a
shows v,1 and v2 for each economy.

treats seasonal effects in W and I and relates them to

the consumptionquota C - Y. The X unit vector is
not containedin the linear space generatedby v1 and
3
V2, reflectingthe seasonal nature of Germanexports.
In the United Kingdom,both vectorsheavilydepend
on C - Y. Consumptionaccountsfor the bulk of the
seasonal fluctuationsin total output. The remaining
seasonalitystems from W and, to a lesser extent, from
I. The comparativelysmall influence of I mirrorsthe
weak seasonal pattern of that variable and separates
the United Kingdomfrom the other countrieswhere
cold wintersimpairinvestmentin the constructionsector.
Additionalto the evaluationof test statistics,which
suffer from limited test power, it is recommendedto
look at sample spectra of the six canonicalvariables
v1Y2t (i = 1,... , 6) for each country.4 These spectra

are naturallyordered:the firstone is certainlystationary, the sixth one clearlyreflects the unit root at -1
and the remainingones are in between. Visual evivectorsthan
dence tends to yield more "cointegrating"
the conservativeformal testing procedure.A feature
In Austria, v1 relates seasonality in Y to I with a enhanced by the spectra is that Germanyhas more
lesser influencefrom X. V2linksthe remainingseason- independent sources of stochastic seasonality than
ality in output to the other two importantsources, W Austria.In Austria,all seasonalstructureconcentrates
and C. The correspondencebetween seasonal fluctua- in the last component which could accommodatea
tions in C and Y plays a lesser role than in the completelydeterministicmodel of seasonality.In Germany, the eye recognizes three to four independent
remaining countries.
In Finland, v, links seasonalityin C to influences
3Scales in the series R and W have been adjustedin order
from output and wages. v2 joins seasonalityin W to
to have the same magnitudeas Y, C, I, X. Yet, R fails to
the accountsaggregates.
make a big impressionon the cointegratingvectors.
4 Due to space constraints,these graphsare not shownhere
In Germany,v, relates seasonalityin exportsto that
of consumptionwith a slight contributionfrom Y. v2 but can be obtainedon requestfrom the author.

329

NOTES
TABLE2.-FIRST Two SOLuTION
VEcrORSTO THE SC PROBLEMS
Y

Austria
Finland
Germany
United Kingdom

Austria
Finland
Germany
United Kingdom

Panel A: Seasonal Cointegration at Frequency

1.000
0.013
-0.279
-0.140
1.000
-0.192
0.011
0.087
- 2.321
1.000
- 0.087
- 0.088
1.000
0.704
-0.826
0.611
- 0.244
- 3.570
1.000
4.860
1.000
-1.024
1.148
-0.288
1.000
-0.956
0.271
-0.061
-0.924
-0.037
1.000
-0.629

7-

-0.001

0.021a

-0.000
0.034
-0.015
0.003
0.001
-0.007
0.001

- 0.481a
1.656a
- 2.585a
0.714a
-2.006
2.624a
0.156a

Panel B: Seasonal Cointegration at Frequency v1/2

- 0.568
- 0.076
1.000
0.003
7.120
0.151
-0.221
-0.174
1.000
0.002
- 0.817
2.679
- 0.049
1.362
1.000
-0.331
1.000
-0.041
0.406
-0.048
1.000
0.305
-0.183
0.002
-1.507
- 0.925
0.419
- 0.088
1.000
0.007
-0.644
1.000
-0.180
-0.426
0.006
-0.318
1.000
-0.200
-1.089
-0.006

- 4.998a
-1.182a
3.441a
-0.114a
-0.175a
- 0.835

0.849a
-2.012a

Note: For the labels of the variables, see section I.

a Significant vectors.

sources of stochastic seasonalitywhich would entail

three or at least two seasonal cointegratingvectors.
Deterministicseasonalityalso appearsto prevailin the
United Kingdom.
In analogy to common trends, common seasonal
sources deserve attentionwhich are found in the last
components.By calculatingmutualcorrelationsamong
the vectors V5 and V6 across the four countries, a
commonsource of seasonalityin output, consumption,
and wages can be identifiedwhich is rather similarin
all four economies.A second seasonal source is common both to Finlandand the United Kingdom,which
shows stronger relations to investment.Coincidences
between v and v2 vectors are weaker, with
Finland/U.K. and Austria/Germany forming loose
couples.
At frequency vr/2, independentseasonal cycles are
fewest in the United Kingdomand in Austria,possibly
only two. Germanyand Finlandinsinuatethree to four
non-stationarycomponents.The vectors corresponding
to the two largestroots are givenin table 2b. There are
some closer similaritiesamong Austria and Germany
and less so between these two and the United Kingdom, while Finnish cointegratingvectors are entirely
different.One commonsource of seasonalityis shared
approximatelyby Austria, Germany,and the United
Kingdom.This seasonalsource is rooted in wages and
has less impacton the Finnishsystem.
One can also test for the hypothesisthat the same
vectorscointegrateat both seasonalfrequencies.In the
Austrianand Finnishsystems,this hypothesisis firmly
rejected,indicatingthat the true cointegratingvectors

might be dynamic.Germanyand the United Kingdom

come closer to sharingvectors at ir and vr/2.
To further assess the amount of deterministicseasonality in the data, a parallel experimentwas performed with seasonal dummiesincluded in (4). Without additional restrictions,seasonalityis granted too
much freedom in such a system, as seasonal patterns
are allowedto persistentlychangeshape and to expand
simultaneously.Therefore, no detailed results of this
experimentare provided.
If the deterministicmodel is correct, the optimum
VAR lag order should decrease as the stochasticseasonal model entails over-differencingand artificial
moving-averageterms. Also, all roots on the ir and
ir/2 problems should be significantas the residuals
from conditioningon the dummies are non-seasonal.
Moreover, the roots at frequency zero should not
change too much, inflated roots indicatingstochastic
seasonality.
Comparedto the purely stochasticmodel, the optimum lag order decreases only slightly for Germany
(from 5 to 4) but falls substantiallyfor the United
Kingdom(from4 to 2). In the remainingtwo countries,
seasonaldummiesdo not affect the lag length selected
by AIC. In all systems,substantialresidualautocorrelation remains.
Seasonaldummieseliminateall evidence on seasonality in the United Kingdomand leave very little in
Austria. In contrast,the dummymodel does not succeed for Germanyand Finland.Slightspill-overeffects
to the zero frequencyreducethe numberof cointegrating vectors to three in Austria and increase their

330

THE REVIEW OF ECONOMICS AND STATISTICS

Consumption Function," Joumal of Econometrics 55

numberto two in Finland. These findingsagree well
(1993),275-298.
with the evidence from the analysiswithout dummies
Philip Hans, "Seasonality,Non-stationarityand the
that Germanydisplaysmore stochasticseasonalitythan Franses,
Forecastingof Monthly Time Series," International
Austriaor the United Kingdom.
Journal of Forecasting 7 (1991), 199-208.

IV. Summaryand Conclusions

Sources and natures of seasonal fluctuationsvary
widely amongnationaleconomies.Even the key question must be answered differentlyfor each country:
deterministicseasonalitymay accuratelydescribe the
Austrianand British economies but fails to do so for
Germany and Finland. MultivariateSC analysis has
been shownto help to clarifythis problem.
Just as it is difficultif not impossibleto definitely
classifyseries as integratedversus trend-stationaryon
the basis of finite samples, the same goes for the
classificationof the seasonalpatterns.Perhaps,it makes
more sense to speak of vectorsthat reducethe correlation structureof the resultingseries substantially,compared to the componentsseries.
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