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Econometric Analysis of Structural Systems with Permanent and Transitory Shocks. Working paper #7

  • Adrian Pagan
  • Hashem Pesaran

    (National Centre for Econometric Research)

This paper considers the implications of the permanent/transitory decomposition of shocks for identification of structural models in the general case where the model might contain more than one permanent structural shock. It provides a simple and intuitive generalization of the influential work of Blanchard and Quah (1989), and shows that structural equations for which there are known permanent shocks must have no error correction terms present in them, thereby freeing up the latter to be used as instruments in estimating their parameters. The proposed approach is illustrated by a re-examination of the identification scheme used in a monetary model by Wickens and Motta (2001), and in a well known paper by Gali (1992) which deals with the construction of an IS-LM model with supply-side effects. We show that the latter imposes more short-run restrictions than are needed because of a failure to fully utilize the cointegration information.

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File URL: http://www.ncer.edu.au/papers/documents/WpNo7Jan07.pdf
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Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 7.

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Date of creation: 15 Jan 2007
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Publication status: published
Handle: RePEc:qut:auncer:2007-1
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Fax: 07 3138 1500
Web page: http://www.ncer.edu.au

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  16. Wooldridge, Jeffrey M., 1990. "A Unified Approach to Robust, Regression-Based Specification Tests," Econometric Theory, Cambridge University Press, vol. 6(01), pages 17-43, March.
  17. Deo, Rohit S., 2000. "Spectral tests of the martingale hypothesis under conditional heteroscedasticity," Journal of Econometrics, Elsevier, vol. 99(2), pages 291-315, December.
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