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When do long-run identifying restrictions give reliable results?

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  • Jon Faust
  • Eric M. Leeper

Abstract

Many recent papers have tried to identify behavioral disturbances in vector autoregressions (VAR's) by imposing restrictions on the long-run effects of shocks. This paper argues that this approach will support reliable structured inferences only if the underlying economy satisfies strong restrictions. Absent restrictions linking long-run and short-run dynamics, every decomposition of a VAR is essentially equally consistent with any long-run restriction. Further, dynamic common factor restrictions must hold if the scheme is to work properly in small models estimated using time-aggregated data. The paper illustrates possible consequences of failure of these assumptions using bivariate models to identify aggregate supply and demand disturbances.

Suggested Citation

  • Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," International Finance Discussion Papers 462, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:462
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1994/462/default.htm
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    References listed on IDEAS

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