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Exogeneity, Cointegration, and Economic Policy Analysis

FRB International Finance Discussion Paper No. 616

40 Pages Posted: 14 Aug 1998  

Neil R. Ericsson

Board of Governors of the Federal Reserve - Division of International Finance (IFDP) - Trade and Financial Studies Section

David F. Hendry

University of Oxford - Department of Economics

Grayham E. Mizon

University of Southampton - Division of Economics

Date Written: June 1998

Abstract

This overview examines conditions for reliable economic policy analysis based on econometric models, focusing on the econometric concepts of exogeneity, cointegration, causality, and invariance. Weak, strong, and super exogeneity are discussed in general; and these concepts are then applied to the use of econometric models in policy analysis when the variables are cointegrated. Implications follow for model constancy, the Lucas critique, equation inversion, and impulse response analysis. A small money-demand model for the United Kingdom illustrates the main analytical points. This paper then summarizes the other articles in this issue's special section on "Exogeneity, Cointegration, and Economic Policy Analysis."

JEL Classification: C50, E41

Suggested Citation

Ericsson, Neil R. and Hendry, David F. and Mizon, Grayham E., Exogeneity, Cointegration, and Economic Policy Analysis (June 1998). FRB International Finance Discussion Paper No. 616. Available at SSRN: https://ssrn.com/abstract=111130 or http://dx.doi.org/10.2139/ssrn.111130

Neil R. Ericsson (Contact Author)

Board of Governors of the Federal Reserve - Division of International Finance (IFDP) - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-3709 (Phone)
202-736-5638 (Fax)

David F. Hendry

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom
+44 1865 278544 (Phone)
+44 1865 278557 (Fax)

Grayham E. Mizon

University of Southampton - Division of Economics ( email )

Southampton, SO17 1BJ
United Kingdom
+44 (0)23 80 592519 (Phone)
+44 (0)23 8059 3858 (Fax)

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