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When do long-run identifying restrictions give reliable results?

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Author Info

  • Jon Faust
  • Eric M. Leeper

Abstract

Many recent articles have identified behavioral disturbances in vector autoregressions by imposing restrictions on the long-run effects of shocks. This article demonstrates that this approach will be unreliable unless the underlying economy satisfies three types of strong restrictions. Although many aspects of these issues have been raised before, this article draws out and illustrates the implications for inferences under the long-run scheme. Furthermore, it provides strategies for dealing with the problems.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 94-2.

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Date of creation: 1994
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Handle: RePEc:fip:fedawp:94-2

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Keywords: Econometric models ; Macroeconomics;

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References

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  1. Tamim Bayoumi & Barry Eichengreen, 1992. "Macroeconomic Adjustment Under Bretton Woods and the Post-Bretton Woods Float: An Impulse-Response Analysis," NBER Working Papers 4169, National Bureau of Economic Research, Inc.
  2. Novales, Alfonso, 1990. "Solving Nonlinear Rational Expectations Models: A Stochastic Equilibrium Model of Interest Rates," Econometrica, Econometric Society, vol. 58(1), pages 93-111, January.
  3. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1992. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
  4. Sims, Christopher A, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," American Economic Review, American Economic Association, vol. 70(2), pages 250-57, May.
  5. Rogers, John H & Wang, Ping, 1993. "Sources of Fluctuations in Relative Prices: Evidence from High Inflation Countries," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 589-605, November.
  6. 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.
  7. Hendry, David F., 1992. "An econometric analysis of TV advertising expenditure in the United Kingdom," Journal of Policy Modeling, Elsevier, vol. 14(3), pages 281-311, June.
  8. Hendry, David F & Mizon, Grayham E, 1978. "Serial Correlation as a Convenient Simplification, not a Nuisance: A Comment on a Study of the Demand for Money by the Bank of England," Economic Journal, Royal Economic Society, vol. 88(351), pages 549-63, September.
  9. 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.
  10. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of Monetary Unification," Department of Economics, Working Paper Series qt791143kp, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  11. Ahmed, Shaghil & Ickes, Barry W. & Ping Wang & Byung Sam Yoo, 1993. "International Business Cycles," American Economic Review, American Economic Association, vol. 83(3), pages 335-59, June.
  12. Tamim Bayoumi and Barry Eichengreen., 1992. "Shocking Aspects of European Monetary Unification," Economics Working Papers 92-187, University of California at Berkeley.
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