A Comparison of the Stochastic Processes of Structural and

Francis Ahking () and Stephen M. Miller ()

The Review of Economics and Statistics, 1987, vol. 69, issue 3, pages 496-502

Abstract: Arnold Zellner and Franz Palm (1974) show that comparing the actual with the implied stochastic process es generating the endogenous variables in a system of dynamic structu ral equations provides important information about the system's corre ct specification. The authors apply their methodology to structural e xchange-rate models. They find that the log of the bilateral exchange rate is generally well approximated by a random-walk model. Thus, th e stochastic processes generating the exogenous variables should also be random-walk models, which in not borne out by our empirical resul ts. They suggest a reconciliation of their results based on a decompo sition technique developed by Stephen Beveridge and Charles R. Nelson (1981). Copyright 1987 by MIT Press.

Date: 1987
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