Detecting Common Dynamics in Transitory Components

Tim M Christensen, Stan Hurn () and Adrian Rodney Pagan ()
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Tim M Christensen: Yale

No 49, NCER Working Paper Series from National Centre for Econometric Research

Abstract: This paper considers VAR/VECM models for variables exhibiting cointegration and common features in the transitory components. While the presence of cointegration reduces the rank of the long-run multiplier matrix, other types of common features lead to rank reduction in the short-run dynamics. These common transitory components arise when linear combination of the first differenced variables in a cointegrated VAR are white noise. This paper offers a reinterpretation of the traditional approach to testing for common feature dynamics, namely checking for a singular covariance matrix for the transitory components. Instead, the matrix of short-run coefficients becomes the focus of the testing procedure thus allowing a wide range of tests for reduced rank in parameter matrices to be potentially relevant tests of common transitory components. The performance of the different methods is illustrated in a Monte Carlo analysis which is then used to reexamine an existing empirical study. Finally, this approach is applied to analyze whether one would observe common dynamics in standard DSGE models.

Keywords: Transitory components; common features; reduced rank; cointegration. (search for similar items in EconPapers)
JEL-codes: C14 C52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2009-11-17
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Journal Article: Detecting Common Dynamics in Transitory Components (2011)
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Persistent link: http://EconPapers.repec.org/RePEc:qut:auncer:2009_62

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