Permanent and transitory shocks in the presence of asymmetric error correction

Felix Chan and G. MacDonald

Applied Economics, 2015, vol. 47, issue 25, 2642-2648

Abstract: This article highlights the potential importance of asymmetries in the loading vector of a set of cointegrated variables for the construction, analysis and interpretation of permanent and transitory shocks using impulse response functions. We derive an asymmetric version of the Permanent-Transitory decomposition suggested by Gonzalo and Ng (2001) and illustrate the potential importance of such asymmetries using the 'cay' data of Lettau and Ludvigson (2004).

Date: 2015
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DOI: 10.1080/00036846.2015.1008765

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