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Estimating shocks and impulse response functions

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Author Info
Michael R. Wickens (Department of Economics and Related Studies, University of York, Heslington, York YO1 5DD, UK)
Roberto Motto (University of York and Universita Statale di Milano, Italy)

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Abstract

This paper examines the issue of how to identify the shocks in a cointegrated VAR when the following assumptions are made: the variables can be classified as endogenous or exogenous, there are as many cointegrating relations as endogenous variables, the cointegrating vectors are identified and they contain at least one exogenous variable. It is shown that with these assumptions it is possible to identify the shocks without the use of further restrictions on the covariance matrix of the disturbances or the short-run dynamics. If the long-run parameters are known the whole model can be estimated by OLS. The analysis is extended to allow the VAR to have both stationary and non-stationary variables. An illustration of the method is provided using the traditional benchmark VAR model involving US data on output, prices, interest rates and money. A liquidity effect is not found using this VAR methodology. Copyright © 2001 John Wiley & Sons, Ltd.

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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 16 (2001)
Issue (Month): 3 ()
Pages: 371-387
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Handle: RePEc:jae:japmet:v:16:y:2001:i:3:p:371-387

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lastrapes, William D. & Selgin, George, 1995. "The liquidity effect: Identifying short-run interest rate dynamics using long-run restrictions," Journal of Macroeconomics, Elsevier, vol. 17(3), pages 387-404. [Downloadable!] (restricted)
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  4. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
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  5. Bewley, R. & Orden, D., 1991. "Alternative Methods for Estimating Long-Run Responses with Application to Australian Import Demand," Papers 91-6, New South Wales - School of Economics.
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  6. Gerrard, W J & Godfrey, L G, 1998. "Diagnostic Checks for Single-Equation Error-Correction and Autoregressive Distributed Lag Models," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 66(2), pages 222-37, March.
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  8. Adrian R. Pagan & John C. Robertson, 1995. "Resolving the liquidity effect," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 33-54. [Downloadable!]
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  9. Pesaran, M. Hashem & Shin, Yongcheol, 1996. "Cointegration and speed of convergence to equilibrium," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 117-143. [Downloadable!] (restricted)
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  10. Harbo, Ingrid, et al, 1998. "Asymptotic Inference on Cointegrating Rank in Partial Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 388-99, October.
  11. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June. [Downloadable!] (restricted)
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  12. Blanchard, Olivier Jean, 1989. "A Traditional Interpretation of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 79(5), pages 1146-64, December. [Downloadable!] (restricted)
  13. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September. [Downloadable!] (restricted)
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  14. Breusch, Trevor S & Wickens, Michael R, 1987. "Dynamic Specification, the Long Run and the Estimation of Transformed Regression Models," CEPR Discussion Papers 154, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  15. Levtchenkova, S & Pagan, A R & Robertson, J C, 1998. " Shocking Stories," Journal of Economic Surveys, Blackwell Publishing, vol. 12(5), pages 507-32, December. [Downloadable!] (restricted)
  16. Wickens, Michael R., 1996. "Interpreting cointegrating vectors and common stochastic trends," Journal of Econometrics, Elsevier, vol. 74(2), pages 255-271, October. [Downloadable!] (restricted)
  17. Gordon, David B & Leeper, Eric M, 1994. "The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1228-47, December. [Downloadable!] (restricted)
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  18. Johansen, Soren & Juselius, Katarina, 1994. "Identification of the long-run and the short-run structure an application to the ISLM model," Journal of Econometrics, Elsevier, vol. 63(1), pages 7-36, July. [Downloadable!] (restricted)
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  19. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233. [Downloadable!] (restricted)
  20. Binder, Michael & Pesaran, M Hashem, 1998. "Decision Making in the Presence of Heterogeneous Information and Social Interactions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1027-52, November.
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  21. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier. [Downloadable!] (restricted)
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  22. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Céline Gauthier & Fuchun Li, 2005. "Linking real activity and financial markets: the first steps towards a small estimated model for Canada," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 253-72 Bank for International Settlements. [Downloadable!]
  2. Stan Hurn & Ralf Becker, 2007. "Testing for nonlinearity in mean in the presence of heteroskedasticity. Working paper #8," NCER Working Paper Series 8, National Centre for Econometric Research. [Downloadable!]
  3. Adrian R. Pagan & M. Hashem Pesaran, 2008. "Econometric Analysis of Structural Systems with Permanent and Transitory Shocks," Discussion Papers 2008-04, School of Economics, The University of New South Wales. [Downloadable!]
    Other versions:
  4. Celine Gauthier & Virginie Traclet, 2004. "Do Domestic Macroeconomic Factors Play a Role in Determining Long-Term Nominal Interest Rates? Application in the Case of a Small Open-Economy," Money Macro and Finance (MMF) Research Group Conference 2004 90, Money Macro and Finance Research Group. [Downloadable!]
  5. Céline Gauthier & Fu Chun Li, 2006. "Linking Real Activity and Financial Markets: The Bonds, Equity, and Money (BEAM) Model," Working Papers 06-42, Bank of Canada. [Downloadable!]
  6. Pagan, A. & Pesaran, M.H., 2007. "On Econometric Analysis of Structural Systems with Permanent and Transitory Shocks and Exogenous Variables," Cambridge Working Papers in Economics 0704, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  7. Polito, Vito & Wickens, Michael R, 2008. "Optimal Monetary Policy using a VAR," CEPR Discussion Papers 6957, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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