The cointegrated VAR model is proposed as an empirically coherent framework for analyzing macroeconomic phenomena within a dynamic system of pulling and pushing forces. As an illustration we show how an economic theory for inflation and money demand gives rise to a number of hypotheses formulated as testable parameter restrictions on cointegrating relations and common trends. The procedure not only allows us to test prior theoretical hypotheses in a valid maximum likelihood framework but also provides additional empirical results suggesting how to modify or improve our theoretical understanding. The latter is important when theoretical implications fail to hold in the data.
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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number
05-05.
Length: 29 pages Date of creation: Apr 2005 Date of revision: Handle: RePEc:kud:kuiedp:0505
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