Prices around the world tend to move together. The data file \(u k p i\) contains information about the price indices in the United Kingdom and in the Euro Area (the United Kingdom is a member of the European Union, but not a member of the single European currency zone) for the period 1996M1-2009M12.

a. Plot the data. Are the series I(1) or I(0)?

b. Are prices in the UK and in the Euro Area cointegrated, or spuriously related? Use both the least squares and the error correction method to test this proposition.

Transcribed Image Text:

20 16- 12 8 4 0 -4 60 60 100 150 200 250 300 FIGURE 12.10 A generated I(2) process.