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Detecting Common Dynamics in Transitory Components

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Author Info

  • Tim M Christensen

    (Yale)

  • Stan Hurn

    ()
    (QUT)

  • Adrian Pagan

    ()
    (QUT)

Abstract

This paper considers VAR/VECM models for variables exhibiting cointegration and common features in the transitory components. While the presence of cointegration reduces the rank of the long-run multiplier matrix, other types of common features lead to rank reduction in the short-run dynamics. These common transitory components arise when linear combination of the first differenced variables in a cointegrated VAR are white noise. This paper offers a reinterpretation of the traditional approach to testing for common feature dynamics, namely checking for a singular covariance matrix for the transitory components. Instead, the matrix of short-run coefficients becomes the focus of the testing procedure thus allowing a wide range of tests for reduced rank in parameter matrices to be potentially relevant tests of common transitory components. The performance of the different methods is illustrated in a Monte Carlo analysis which is then used to reexamine an existing empirical study. Finally, this approach is applied to analyze whether one would observe common dynamics in standard DSGE models.

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Bibliographic Info

Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 49.

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Length: 31
Date of creation: 17 Nov 2009
Date of revision:
Handle: RePEc:qut:auncer:2009_62

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Keywords: Transitory components; common features; reduced rank; cointegration.;

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Cited by:
  1. Hecq, Alain & Issler, João Victor, 2012. "A Common-Feature Approach for Testing Present-Value Restrictions with Financial Data," Economics Working Papers (Ensaios Economicos da EPGE) 728, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).

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