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Econometric Issues when Modelling with a Mixture of I(1) and I(0) Variables

  • Lance A Fisher

    ()

    (Macquarie University)

  • Syeon-seung Huh

    ()

    (Yonsei University)

  • Adrian Pagan

    ()

    (University of Sydney)

This paper considers structural models when both I(1) and I(0) variables are present. It is necessary to extend the traditional classification of shocks as permanent and transitory, and we do this by introducing a mixed shock. The extra shocks coming from introducing I(0) variables into a system are then classified as either mixed or transitory. Conditions are derived upon the nature of the SVAR in the event that these extra shocks are transitory. We then analyse what happens when there are mixed shocks, finding that it changes a number of ideas that have become established from the cointegration literature. The ideas are illustrated using a well-known SVAR where there are mixed shocks. This SVAR is re-formulated so that the extra shocks coming from the introduction of I(0) variables do not affect relative prices in the long-run and it is found that this has major implications for whether there is a price puzzle. It is also shown how to handle long-run parametric restrictions when some shocks are identified using sign restrictions.

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File URL: http://www.ncer.edu.au/papers/documents/WP97.pdf
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Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 97.

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Length: 24 pages
Date of creation: 09 Oct 2013
Date of revision:
Handle: RePEc:qut:auncer:2013_9
Contact details of provider: Phone: 07 3138 5066
Fax: 07 3138 1500
Web page: http://www.ncer.edu.au

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  1. Peersman, Gert, 2003. "What Caused the Early Millennium Slowdown? Evidence Based on Vector Autoregressions," CEPR Discussion Papers 4087, C.E.P.R. Discussion Papers.
  2. Uhlig, Harald, 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," CEPR Discussion Papers 2137, C.E.P.R. Discussion Papers.
  3. Renee Fry & Adrian Pagan, 2010. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," CAMA Working Papers 2010-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Adrian R. Pagan & M. Hashem Pesaran, 2008. "Econometric Analysis of Structural Systems with Permanent and Transitory Shocks," Discussion Papers 2008-04, School of Economics, The University of New South Wales.
  5. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," NBER Working Papers 10220, National Bureau of Economic Research, Inc.
  6. Fabio Canova & Luca Gambetti & Evi Pappa, 2007. "The Structural Dynamics of Output Growth and Inflation: Some International Evidence," Economic Journal, Royal Economic Society, vol. 117(519), pages C167-C191, 03.
  7. Frank Smets, 1997. "Measuring monetary policy shocks in France, Germany and Italy: The role of the exchange rate," BIS Working Papers 42, Bank for International Settlements.
  8. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," NBER Working Papers 2589, National Bureau of Economic Research, Inc.
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