Econometric Analysis of Structural Systems with Permanent and Transitory Shocks
Australian National University (ANU) - Research School of Social Sciences (RSSS); University of New South Wales - Australian School of Business - School of Economics
M. Hashem Pesaran
University of Southern California; Cambridge University - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Institute for the Study of Labor (IZA)
February 4, 2008
UNSW Australian School of Business Research Paper No. 2008 ECON 04
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 with known permanent shocks can not contain error correction terms, thereby freeing up the latter to be used as instruments in estimating their parameters. The approach is illustrated by a re-examination of the identification schemes used by Wickens and Motto (2001), Shapiro and Watson (1988), King, Plosser, Stock, Watson (1991), Gali (1992, 1999) and Fisher (2006).
Number of Pages in PDF File: 26
Keywords: Permanent shocks, structural identification, error correction
JEL Classification: C30, C32, E10working papers series
Date posted: August 27, 2008
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