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Detecting Common Dynamics in Transitory Components

Listed author(s):
  • Tim M Christensen

    (Yale)

  • Stan Hurn

    ()

    (QUT)

  • Adrian Pagan

    ()

    (QUT)

This paper considers VAR/VECM models for variables exhibiting cointegration and common features in the transitory components. While the presence of cointegration reduces the rank of the long-run multiplier matrix, other types of common features lead to rank reduction in the short-run dynamics. These common transitory components arise when linear combination of the first differenced variables in a cointegrated VAR are white noise. This paper offers a reinterpretation of the traditional approach to testing for common feature dynamics, namely checking for a singular covariance matrix for the transitory components. Instead, the matrix of short-run coefficients becomes the focus of the testing procedure thus allowing a wide range of tests for reduced rank in parameter matrices to be potentially relevant tests of common transitory components. The performance of the different methods is illustrated in a Monte Carlo analysis which is then used to reexamine an existing empirical study. Finally, this approach is applied to analyze whether one would observe common dynamics in standard DSGE models.

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File URL: http://www.ncer.edu.au/papers/documents/WPNo49.pdf
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Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 49.

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Length: 31
Date of creation: 17 Nov 2009
Handle: RePEc:qut:auncer:2009_62
Contact details of provider: Phone: 07 3138 5066
Fax: 07 3138 1500
Web page: http://www.ncer.edu.au

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  1. Lubik, Thomas A. & Schorfheide, Frank, 2007. "Do central banks respond to exchange rate movements? A structural investigation," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1069-1087, May.
  2. Peijie Wang, 2003. "Cycles and Common Cycles in Property and Related Sectors," International Real Estate Review, Asian Real Estate Society, vol. 6(1), pages 22-42.
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