IDEAS home Printed from https://ideas.repec.org/p/cte/wsrepe/6203.html
   My bibliography  Save this paper

A systematic framework for analyzing the dynamic effects of permanent and transitory shocks

Author

Listed:
  • Ng, Serena
  • Gonzalo, Jesús

Abstract

This paper proposes a systematic framework for analyzing the dynamic effects of permanent and transitory shocks on a system of n economic variables. We consider a two-step orthogonolization on the residuals of a VECM with r co integrating vectors. The first step separates the permanent shocks and r transitory shocks. The approach exploits the co integrating relationships in the data. Although theoretical restrictions can be used, they are not necessary. We also show how impulse response functions can be constructed to trace out the propagating mechanism of shocks distinguished by their degree of persistence. This differs from the common approach of distinguishing shocks by their origin, and hence offers a complementary way of analyzing macroeconomic dynamics.

Suggested Citation

  • Ng, Serena & Gonzalo, Jesús, 1996. "A systematic framework for analyzing the dynamic effects of permanent and transitory shocks," DES - Working Papers. Statistics and Econometrics. WS 6203, Universidad Carlos III de Madrid. Departamento de Estadística.
  • Handle: RePEc:cte:wsrepe:6203
    as

    Download full text from publisher

    File URL: https://e-archivo.uc3m.es/bitstream/handle/10016/6203/ws961605.pdf?sequence=1
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Campbell, John Y. & Clarida, Richard H., 1987. "The dollar and real interest rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 103-139, January.
    2. Runkle, David E, 1987. "Vector Autoregressions and Reality," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 437-442, October.
    3. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-652, June.
    4. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    5. Richard H. Clarida & Jordi Gali, 1994. "Sources of real exchange rate fluctuations: how important are nominal shocks?," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
    6. Runkle, David E, 1987. "Vector Autoregressions and Reality: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 454-454, October.
    7. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
    8. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-334, June.
    9. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 869-902.
    10. Ng, S. & Perron, P., 1994. "Unit Root Tests ARMA Models with Data Dependent Methods for the Selection of the Truncation Lag," Cahiers de recherche 9423, Universite de Montreal, Departement de sciences economiques.
    11. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    12. David E. Runkle, 1987. "Vector autoregressions and reality," Staff Report 107, Federal Reserve Bank of Minneapolis.
    13. Warne, A., 1993. "A Common Trends Model: Identification, Estimation and Inference," Papers 555, Stockholm - International Economic Studies.
    14. Gonzalo, Jesus & Ng, Serena, 2001. "A systematic framework for analyzing the dynamic effects of permanent and transitory shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 25(10), pages 1527-1546, October.
    15. Evans, George & Reichlin, Lucrezia, 1994. "Information, forecasts, and measurement of the business cycle," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 233-254, April.
    16. Gonzalo, Jesus & Granger, Clive W J, 1995. "Estimation of Common Long-Memory Components in Cointegrated Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 27-35, January.
    17. 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 819-840, September.
    18. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
    19. Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-415, June.
    20. Blanchard, Olivier Jean & Quah, Danny, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Reply," American Economic Review, American Economic Association, vol. 83(3), pages 653-658, June.
    21. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156, National Bureau of Economic Research, Inc.
    22. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-472, August.
    23. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
    24. Ng, Serena & Perron, Pierre, 1997. "Estimation and inference in nearly unbalanced nearly cointegrated systems," Journal of Econometrics, Elsevier, vol. 79(1), pages 53-81, July.
    25. Phillips, Peter C. B., 1998. "Impulse response and forecast error variance asymptotics in nonstationary VARs," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 21-56.
    26. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    27. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January.
    28. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    29. Johansen, Soren, 1995. "Identifying restrictions of linear equations with applications to simultaneous equations and cointegration," Journal of Econometrics, Elsevier, vol. 69(1), pages 111-132, September.
    30. Geweke, John F, 1986. "The Superneutrality of Money in the United States: An Interpretation of the Evidence," Econometrica, Econometric Society, vol. 54(1), pages 1-21, January.
    31. Martin Feldstein, 1994. "Taxes, Leverage and the National Return on Outbound Foreign Direct Investment," NBER Working Papers 4689, National Bureau of Economic Research, Inc.
    32. John H. Cochrane, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 241-265.
    33. Lutkepohl, Helmut & Reimers, Hans-Eggert, 1992. "Impulse response analysis of cointegrated systems," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 53-78, January.
    34. Podivinsky, Jan M., 1992. "Small sample properties of tests of linear restrictions on cointegrating vectors and their weights," Economics Letters, Elsevier, vol. 39(1), pages 13-18, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ericsson, Neil R & Hendry, David F & Mizon, Grayham E, 1998. "Exogeneity, Cointegration, and Economic Policy Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 370-387, October.
    2. Catherine Bruneau & Olivier De Bandt, 1999. "La modélisation Var "structurel" : application à la politique monétaire en France," Économie et Prévision, Programme National Persée, vol. 137(1), pages 67-94.
    3. Norman J. Morin, 2006. "Likelihood ratio tests on cointegrating vectors, disequilibrium adjustment vectors, and their orthogonal complements," Finance and Economics Discussion Series 2006-21, Board of Governors of the Federal Reserve System (U.S.).
    4. Christophe Kamps, 2005. "The Dynamic Effects of Public Capital: VAR Evidence for 22 OECD Countries," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 533-558, August.
    5. Farzanegan, Mohammad Reza & Markwardt, Gunther, 2009. "The effects of oil price shocks on the Iranian economy," Energy Economics, Elsevier, vol. 31(1), pages 134-151, January.
    6. Pierre St-Amant & Simon van Norden, 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
    7. M.S.Rafiq, 2006. "Business Cycle Moderation - Good Policies or Good Luck: Evidence and Explanations for the Euro Area," Discussion Paper Series 2006_21, Department of Economics, Loughborough University.
    8. Pedro José Pérez Vázquez, 2003. "Fuentes de variabilidad en las principales economías occidentales," Investigaciones Economicas, Fundación SEPI, vol. 27(3), pages 565-591, September.
    9. James B. Bullard & John W. Keating, 1994. "Superneutrality in postwar economies," Working Papers 1994-011, Federal Reserve Bank of St. Louis.
    10. Issler, Joao Victor & Vahid, Farshid, 2001. "Common cycles and the importance of transitory shocks to macroeconomic aggregates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 449-475, June.
    11. Fisher, Lance A. & Huh, Hyeon-seung & Tallman, Ellis W., 2003. "Permanent income and transitory variation in investment and output," Journal of Macroeconomics, Elsevier, vol. 25(2), pages 149-168, June.
    12. Cochrane, John H., 1994. "Shocks," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 295-364, December.
    13. Prof. Neil D. Karunaratne, 2002. "Microeconomic Shocks, Depreciation and Inflation: an Australian Perspective," Discussion Papers Series 298, School of Economics, University of Queensland, Australia.
    14. Martin Lettau & Sydney C. Ludvigson, 2004. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," American Economic Review, American Economic Association, vol. 94(1), pages 276-299, March.
    15. Lise Pichette, 2004. "Are Wealth Effects Important for Canada," Bank of Canada Review, Bank of Canada, vol. 2004(Spring), pages 29-35.
    16. Esposti, Roberto, 2002. "Public agricultural R&D design and technological spill-ins: A dynamic model," Research Policy, Elsevier, vol. 31(5), pages 693-717, July.
    17. Dupasquier, Chantal & Guay, Alain & St-Amant, Pierre, 1999. "A Survey of Alternative Methodologies for Estimating Potential Output and the Output Gap," Journal of Macroeconomics, Elsevier, vol. 21(3), pages 577-595, July.
    18. Valter Di Giacinto & Giacinto Micucci & Pasqualino Montanaro, 2010. "Dynamic Macroeconomic Effects of Public Capital: Evidence from Regional Italian Data," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 69(1), pages 29-66, April.
    19. Luis Fernando Melo & Franz A.Hamann, 1998. "Inflación Básica.Una Estimación Basada en Modelos VAR Estructurales," Borradores de Economia 093, Banco de la Republica de Colombia.
    20. Gavosto, Andrea & Pellegrini, Guido, 1999. "Demand and supply shocks in Italy:: An application to industrial output," European Economic Review, Elsevier, vol. 43(9), pages 1679-1703, October.

    More about this item

    Keywords

    VAR;

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cte:wsrepe:6203. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://portal.uc3m.es/portal/page/portal/dpto_estadistica .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ana Poveda (email available below). General contact details of provider: http://portal.uc3m.es/portal/page/portal/dpto_estadistica .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.