A Monte Carlo test for the identifying assumptions of the Blanchard and Quah (1989) model
Applied Economics Letters, 2013, vol. 20, issue 6, 601-605
In their VAR model, Blanchard and Quah (BQ, 1989) employed uncorrelatedness between Aggregate Supply (AS) and Aggregate Demand (AD) shocks and the long-run output neutrality condition as identifying assumptions. This article conducts a simple Monte Carlo experiment to gauge how well the BQ procedure can approximate the true structure if the underlying assumptions of uncorrelatedness and long-run output neutrality are not supported by data.
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