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Econometric Issues when Modelling with a Mixture of I(1) and I(0) Variables

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  • Lance A Fisher

    ()
    (Macquarie University)

  • Syeon-seung Huh

    ()
    (Yonsei University)

  • Adrian Pagan

    ()
    (University of Sydney)

Abstract

This paper considers structural models when both I(1) and I(0) variables are present. It is necessary to extend the traditional classification of shocks as permanent and transitory, and we do this by introducing a mixed shock. The extra shocks coming from introducing I(0) variables into a system are then classified as either mixed or transitory. Conditions are derived upon the nature of the SVAR in the event that these extra shocks are transitory. We then analyse what happens when there are mixed shocks, finding that it changes a number of ideas that have become established from the cointegration literature. The ideas are illustrated using a well-known SVAR where there are mixed shocks. This SVAR is re-formulated so that the extra shocks coming from the introduction of I(0) variables do not affect relative prices in the long-run and it is found that this has major implications for whether there is a price puzzle. It is also shown how to handle long-run parametric restrictions when some shocks are identified using sign restrictions.

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File URL: http://www.ncer.edu.au/papers/documents/WP97.pdf
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Bibliographic Info

Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 97.

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Length: 24 pages
Date of creation: 09 Oct 2013
Date of revision:
Handle: RePEc:qut:auncer:2013_9

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Related research

Keywords: Mixed models; transitory shocks; mixed shocks; long-run restrictions; sign restrictions; instrumental variables;

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References

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  1. Gert Peersman, 2005. "What caused the early millennium slowdown? Evidence based on vector autoregressions," Bank of England working papers 272, Bank of England.
  2. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach," Finance and Economics Discussion Series 2004-03, Board of Governors of the Federal Reserve System (U.S.).
  3. Uhlig, H.F.H.V.S., 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," Discussion Paper 1999-28, Tilburg University, Center for Economic Research.
  4. Renee Fry & Adrian Pagan, 2010. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," NCER Working Paper Series 57, National Centre for Econometric Research.
  5. Fabio Canova & Luca Gambetti & Evi Pappa, 2006. "The structural dynamics of output growth and inflation: some international evidence," Economics Working Papers 971, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2006.
  6. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," NBER Working Papers 2589, National Bureau of Economic Research, Inc.
  7. Adrian R. Pagan & M. Hashem Pesaran, 2008. "Econometric Analysis of Structural Systems with Permanent and Transitory Shocks," Discussion Papers 2008-04, School of Economics, The University of New South Wales.
  8. Frank Smets, 1997. "Measuring monetary policy shocks in France, Germany and Italy: The role of the exchange rate," BIS Working Papers 42, Bank for International Settlements.
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Cited by:
  1. Dungey, Mardi & Osborne, Denise, 2013. "International Transmissions to Australia: The Roles of the US and Euro Area," Working Papers 17208, University of Tasmania, School of Economics and Finance, revised 16 Oct 2013.

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