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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)

  • Hyeon-seung Huh

    (Yonsei University)

  • Adrian R. 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: ftp://repec.yonsei.ac.kr/repec/yon/wpaper/2013rwp-61.pdf
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Bibliographic Info

Paper provided by Yonsei University, Yonsei Economics Research Institute in its series Working papers with number 2013rwp-61.

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Length: 25pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:yon:wpaper:2013rwp-61

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Keywords: Mixed models; transitory shocks; mixed shocks; long?run restrictions; sign restrictions; instrumental variables business cycles;

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References

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  1. Uhlig, Harald, 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2137, C.E.P.R. Discussion Papers.
  2. Adrian R. Pagan & M. Hashem Pesaran, 2008. "Econometric Analysis of Structural Systems with Permanent and Transitory Shocks," Discussion Papers, School of Economics, The University of New South Wales 2008-04, School of Economics, The University of New South Wales.
  3. Gert Peersman, 2005. "What caused the early millennium slowdown? Evidence based on vector autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 20(2), pages 185-207.
  4. Renee Fry & Adrian Pagan, 2010. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," CAMA Working Papers 2010-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. 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, Board of Governors of the Federal Reserve System (U.S.) 2004-03, Board of Governors of the Federal Reserve System (U.S.).
  6. Fabio Canova & Luca Gambetti & Evi Pappa, 2007. "The Structural Dynamics of Output Growth and Inflation: Some International Evidence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 117(519), pages C167-C191, 03.
  7. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 870, Cowles Foundation for Research in Economics, Yale University.
  8. Fank Smets, 1997. "Measuring Monetary Policy Shocks in France, Germany and Italy: The Role of The Exchange Rate," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), Swiss Society of Economics and Statistics (SSES), vol. 133(III), pages 597-616, September.
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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, University of Tasmania, School of Economics and Finance 17208, University of Tasmania, School of Economics and Finance, revised 16 Oct 2013.

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