Econometric Analysis of Structural Systems with Permanent and Transitory Shocks. Working paper #7

Adrian Pagan and Mohammad Pesaran
Authors registered in the RePEc Author Service: Stan Hurn

No 7, NCER Working Paper Series from National Centre for Econometric Research

Abstract: This paper considers the implications of the permanent/transitory decomposition of shocks for identification of structural models in the general case where the model might contain more than one permanent structural shock. It provides a simple and intuitive generalization of the influential work of Blanchard and Quah (1989), and shows that structural equations for which there are known permanent shocks must have no error correction terms present in them, thereby freeing up the latter to be used as instruments in estimating their parameters. The proposed approach is illustrated by a re-examination of the identification scheme used in a monetary model by Wickens and Motta (2001), and in a well known paper by Gali (1992) which deals with the construction of an IS-LM model with supply-side effects. We show that the latter imposes more short-run restrictions than are needed because of a failure to fully utilize the cointegration information.

Keywords: Permanent shocks; structural identi?cation; error correction models; IS-LM models (search for similar items in EconPapers)
Date: 2007-01-15
New Economics Papers: this item is included in nep-cba, nep-ecm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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