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Estimating shocks and impulse response functions

  • Michael R. Wickens

    (Department of Economics and Related Studies, University of York, Heslington, York YO1 5DD, UK)

  • Roberto Motto

    (University of York and Universita Statale di Milano, Italy)

This paper examines the issue of how to identify the shocks in a cointegrated VAR when the following assumptions are made: the variables can be classified as endogenous or exogenous, there are as many cointegrating relations as endogenous variables, the cointegrating vectors are identified and they contain at least one exogenous variable. It is shown that with these assumptions it is possible to identify the shocks without the use of further restrictions on the covariance matrix of the disturbances or the short-run dynamics. If the long-run parameters are known the whole model can be estimated by OLS. The analysis is extended to allow the VAR to have both stationary and non-stationary variables. An illustration of the method is provided using the traditional benchmark VAR model involving US data on output, prices, interest rates and money. A liquidity effect is not found using this VAR methodology. Copyright © 2001 John Wiley & Sons, Ltd.

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File URL: http://qed.econ.queensu.ca:80/jae/2001-v16.3/
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 16 (2001)
Issue (Month): 3 ()
Pages: 371-387

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Handle: RePEc:jae:japmet:v:16:y:2001:i:3:p:371-387
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  10. 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.
  11. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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  13. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-40, September.
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  16. Johansen, Soren & Juselius, Katarina, 1994. "Identification of the long-run and the short-run structure an application to the ISLM model," Journal of Econometrics, Elsevier, vol. 63(1), pages 7-36, July.
  17. Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, vol. 97(2), pages 293-343, August.
  18. Pesaran, M.H. & Shin, Y., 1993. "Cointegration and Speed of Convergence to Equilibrium," Cambridge Working Papers in Economics 9311, Faculty of Economics, University of Cambridge.
  19. Pesaran, M. H. & Smith, Ron P., 1998. "Structural Analysis of Cointegrating VARs," Cambridge Working Papers in Economics 9811, Faculty of Economics, University of Cambridge.
  20. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  21. M. Hashem Pesaran & Ron P. Smith, 1998. "Structural Analysis of Cointegrating VARs," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 471-505, December.
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  23. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  24. Harbo, Ingrid, et al, 1998. "Asymptotic Inference on Cointegrating Rank in Partial Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 388-99, October.
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