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Exogeneity, causality, and co-breaking in economic policy analysis of a small econometric model of money in the UK

Author

Listed:
  • Grayham E. Mizon

    (Southampton University, S017 1BJ, UK)

  • David F. Hendry

    (Nuffield College, Oxford OX1 1NF, UK)

Abstract

Since the objective of economic policy is to change target variables in the DGP, when economic policy analysis uses an econometric model, it is important that the model delivers reliable inferences about policy responses in the DGP. This requires that the model be congruent and encompassing, and hence exogeneity, causality, cointegration, co-breaking, and invariance all play major roles. We discuss these roles in linear cointegrated VARs, prior to illustrating their importance in a bivariate model of money and interest rates in the UK over the last century.

Suggested Citation

  • Grayham E. Mizon & David F. Hendry, 1998. "Exogeneity, causality, and co-breaking in economic policy analysis of a small econometric model of money in the UK," Empirical Economics, Springer, vol. 23(3), pages 267-294.
  • Handle: RePEc:spr:empeco:v:23:y:1998:i:3:p:267-294
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    More about this item

    Keywords

    Exogeneity · causality · invariance · cointegration · co-breaking · impulse responses · money demand;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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