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

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  • St-Amant, P.
  • Tessier, D.

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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Bibliographic Info

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
Date of revision:
Handle: RePEc:bca:bocawp:98-4

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Keywords: Econometric and statistical methods;

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References

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  1. 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.
  2. Söderlind, Paul & Vredin, Anders, 1994. "Applied Cointegration Analysis in the Mirror of Macroeconomic Theory," Working Paper Series in Economics and Finance 30, Stockholm School of Economics.
  3. Phillips, Peter C. B., 1998. "Impulse response and forecast error variance asymptotics in nonstationary VARs," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 21-56.
  4. Dufour, J.M., 1995. "Some Impossibility Theorems in Econometrics with Applications to Instrumental Variables, Dynamic Models and Cointegration," Cahiers de recherche 9539, Universite de Montreal, Departement de sciences economiques.
  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.
  6. 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.
  7. Faust, Jon & Leeper, Eric M, 1997. "When Do Long-Run Identifying Restrictions Give Reliable Results?," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(3), pages 345-53, July.
  8. repec:cup:etheor:v:12:y:1996:i:4:p:724-31 is not listed on IDEAS
  9. 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.
  10. Alain DeSerres & Alain Guay, 1995. "Selection of the Truncation Lag in Structural VARs (or VECMs) with Long-Run Restrictions," Econometrics 9510001, EconWPA.
  11. Matthew Shapiro & Mark Watson, 1988. "Sources of Business Cycles Fluctuations," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156 National Bureau of Economic Research, Inc.
  12. repec:wop:humbsf:1995-27 is not listed on IDEAS
  13. Sims, Christopher A, 1971. "Discrete Approximations to Continuous Time Distributed Lags in Econometrics," Econometrica, Econometric Society, vol. 39(3), pages 545-63, May.
  14. Timothy Cogley, 1997. "Evaluating non-structural measures of the business cycle," Economic Review, Federal Reserve Bank of San Francisco, pages 3-21.
  15. 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.
  16. Marco Lippi & Lucrezia Reichlin, 1993. "The dynamic effects of aggregate demand and supply disturbances: comment," ULB Institutional Repository 2013/10159, ULB -- Universite Libre de Bruxelles.
  17. 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.
  18. 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.
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Citations

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Cited by:
  1. Martha Misas & Carlos Esteban Posada, . "Crecimiento y Ciclos Económicos en Colombia en el Siglo XX: El aporte de un VAR Estructural," Borradores de Economia 155, Banco de la Republica de Colombia.
  2. 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.
  3. Mark S Astley & Tony Yates, 1999. "Inflation and real disequilibria," Bank of England working papers 103, Bank of England.

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