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A Discussion of the Reliability of Results Obtained with Long-Run Identifying Restrictions

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Author Info
St-Amant, P.
Tessier, D.

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Abstract

In a recent article, Faust and Leeper (1997) discuss reasons why inference from structural VARs identified with long-run restrictions may not be reliable. In this paper, the authors argue that there are reasons to believe that Faust and Leeper's arguments are not devastating in practice. First, simulation exercises suggest that this approach does well when used with data generated with standard macroeconomic models. Second, empirical applications suggest that it gives results that are much more robust than would be implied by Faust and Leeper's main proposition. A reasonable approach would appear to be, therefore, to follow Sims' (1971; 1972) and Dufour's (1997) recommendation and to present robustness checks, allowing readers to judge for themselves what the effects of possible approximation errors might be.

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File URL: http://www.bankofcanada.ca/en/res/wp/1998/wp98-4.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 98-4.

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Length: 26 pages
Date of creation: 1998
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Handle: RePEc:bca:bocawp:98-4

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Related research
Keywords: Econometric and statistical methods;

Find related papers by JEL classification:
C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General
E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation

References listed on IDEAS
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  1. J. Dufour, . "Some Impossibility Theorems in Econometrics with Applications to Instrumental Variables, Dynamic Models and Cointegration," Sonderforschungsbereich 373 1995-27, Humboldt Universitaet Berlin.
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  2. Sims, Christopher A, 1971. "Discrete Approximations to Continuous Time Distributed Lags in Econometrics," Econometrica, Econometric Society, vol. 39(3), pages 545-63, May. [Downloadable!] (restricted)
  3. Soderlind, Paul & Vredin, Anders, 1996. "Applied Cointegration Analysis in the Mirror of Macroeconomic Theory," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(4), pages 363-81, July-Aug.. [Downloadable!] (restricted)
    Other versions:
  4. repec:cup:etheor:v:12:y:1996:i:4:p:724-31 is not listed on IDEAS
  5. Faust, Jon, 1996. "Near Observational Equivalence and Theoretical size Problems with Unit Root Tests," Econometric Theory, Cambridge University Press, vol. 12(04), pages 724-731, October. [Downloadable!]
  6. Alain DeSerres & Alain Guay, 1995. "Selection of the Truncation Lag in Structural VARs (or VECMs) with Long-Run Restrictions," Econometrics 9510001, EconWPA. [Downloadable!]
  7. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-52, June. [Downloadable!] (restricted)
  8. 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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  9. Peter C.B. Phillips, 1995. "Impulse Response and Forecast Error Variance Asymptotics in Nonstationary VAR's," Cowles Foundation Discussion Papers 1102, Cowles Foundation, Yale University. [Downloadable!]
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  10. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," Working Paper 94-2, Federal Reserve Bank of Atlanta.
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  11. Blough, Stephen R, 1992. "The Relationship between Power and Level for Generic Unit Root Tests in Finite Samples," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(3), pages 295-308, July-Sept. [Downloadable!] (restricted)
  12. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers 870, Cowles Foundation, Yale University. [Downloadable!]
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  13. Chantal Dupasquier & Alain Guay & Pierre St-Amant, 1997. "A Comparison of Alternative Methodologies for Estimating Potential Output and the Output Gap," Working Papers 97-5, Bank of Canada. [Downloadable!]
  14. Timothy Cogley, 1997. "Evaluating non-structural measures of the business cycle," Economic Review, Federal Reserve Bank of San Francisco, pages 3-21. [Downloadable!]
  15. Cochrane, John H., 1991. "A critique of the application of unit root tests," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 275-284, April. [Downloadable!] (restricted)
  16. Braun, Phillip A. & Mittnik, Stefan, 1993. "Misspecifications in vector autoregressions and their effects on impulse responses and variance decompositions," Journal of Econometrics, Elsevier, vol. 59(3), pages 319-341, October. [Downloadable!] (restricted)
  17. Lutkepohl, Helmut & Poskitt, D S, 1996. "Specification of Echelon-Form VARMA Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 69-79, January.
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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. Lalonde, René & Page, Jennifer & St-Amant, Pierre, 1998. "Une nouvelle méthode d'estimation de l'écart de production et son application aux États-Unis, au Canada et à l'Allemagne," Working Papers 98-21, Bank of Canada. [Downloadable!]
  2. Martha Misas A. & Carlos Esteban Posada, 2000. "Crecimiento y Ciclos Económicos en Colombia en el siglo XX: El Aporte de un VAR Estructural," BORRADORES DE ECONOMIA 002229, BANCO DE LA REPÚBLICA. [Downloadable!]
    Other versions:
  3. Mark S Astley & Tony Yates, . "Inflation and real disequilibria," Bank of England working papers 103, Bank of England. [Downloadable!]
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