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Identification, Long-Run Relations, and Fundamental Innovations in a Simple Cointegrated System

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  • William J. Crowder
  • Dennis L. Hoffman
  • Robert H. Rasche

Abstract

This paper examines the roles played by innovations identified from a simple four-variable VAR characterized by cointegration. Using knowledge of cointegration rank and “textbook” relations that link macroeconomic aggregates, we identify distinct “real” and “nominal” innovations that dictate the long-run behavior of the model. We also examine the explanatory power of transitory innovations that are orthogonal to these permanent shocks. One of the permanent shocks displays all the characteristics of a technology or “supply” innovation, while one of the transitory innovations--identified by imposing short-run price rigidity--is interpretable as a “demand” side impulse. The permanent nominal shock bears the imprint of an innovation in aggregate inflation expectations. Historical decomposition and comparison with variables that are external to the model reveals the relative importance of the shocks at various episodes. © 1999 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 81 (1999)
Issue (Month): 1 (February)
Pages: 109-121

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Handle: RePEc:tpr:restat:v:81:y:1999:i:1:p:109-121

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Web page: http://mitpress.mit.edu/journals/

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Cited by:
  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, Bank for International Settlements, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 253-72 Bank for International Settlements.
  2. Anthony Garratt & Donald Robertson & Stephen Wright, 2005. "Permanent vs Transitory Components and Economic Fundamentals," Birkbeck Working Papers in Economics and Finance, Birkbeck, Department of Economics, Mathematics & Statistics 0501, Birkbeck, Department of Economics, Mathematics & Statistics.
  3. Céline Gauthier & Fu Chun Li, 2006. "Linking Real Activity and Financial Markets: The Bonds, Equity, and Money (BEAM) Model," Working Papers, Bank of Canada 06-42, Bank of Canada.
  4. Anderson, Richard G. & Hoffman, Dennis L. & Rasche, Robert H., 2002. "A vector error-correction forecasting model of the US economy," Journal of Macroeconomics, Elsevier, Elsevier, vol. 24(4), pages 569-598, December.
  5. Iacoviello, Matteo, 2000. "House prices and the macroeconomy in Europe: Results from a structural var analysis," Working Paper Series, European Central Bank 0018, European Central Bank.
  6. Fisher, Lance A. & Huh, Hyeon-seung & Tallman, Ellis W., 2003. "Permanent income and transitory variation in investment and output," Journal of Macroeconomics, Elsevier, Elsevier, vol. 25(2), pages 149-168, June.
  7. Anthony Garratt & Kevin Lee & M. Hashem Pesaran & Yongcheol Shin, 2003. "A Long run structural macroeconometric model of the UK," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(487), pages 412-455, 04.
  8. Choo, Han Gwang & Kurita, Takamitsu, 2011. "An empirical investigation of monetary interaction in the Korean economy," International Review of Economics & Finance, Elsevier, Elsevier, vol. 20(2), pages 267-280, April.
  9. Duarte, Rita & Marques, Carlos Robalo, 2009. "The dynamic effects of shocks to wages and prices in the United States and the euro area," Working Paper Series, European Central Bank 1067, European Central Bank.
  10. Crowder, William J., 2012. "The liquidity effect: Evidence from the U.S," Economics Letters, Elsevier, Elsevier, vol. 117(1), pages 315-317.
  11. Chen, Pu & Schneider, Elena & Frohn, Joachim, 2008. "A Long-Run Structural Macroeconometric Model for Germany: An Empirical Note," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, Kiel Institute for the World Economy, vol. 2(16), pages 1-12.

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