Econometric Analysis of Structural Systems with Permanent and Transitory Shocks

26 Pages Posted: 27 Aug 2008  

Adrian Pagan

Australian National University (ANU) - Research School of Social Sciences (RSSS); UNSW Australia Business School, School of Economics

M. Hashem Pesaran

USC Dornsife Institute for New Economic Thinking; University of Southern California; Trinity College, Cambridge

Date Written: February 4, 2008

Abstract

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).

Keywords: Permanent shocks, structural identification, error correction

JEL Classification: C30, C32, E10

Suggested Citation

Pagan, Adrian and Pesaran, M. Hashem, Econometric Analysis of Structural Systems with Permanent and Transitory Shocks (February 4, 2008). UNSW Australian School of Business Research Paper No. 2008 ECON 04. Available at SSRN: https://ssrn.com/abstract=1251542 or http://dx.doi.org/10.2139/ssrn.1251542

Adrian R. Pagan (Contact Author)

Australian National University (ANU) - Research School of Social Sciences (RSSS) ( email )

Canberra, Australian Capital Territory 0200
Australia
+61 2 6249 2216 (Phone)
+61 06 249 0182 (Fax)

UNSW Australia Business School, School of Economics

High Street
Sydney, NSW 2052
Australia

M. Hashem Pesaran

USC Dornsife Institute for New Economic Thinking ( email )

3620 S. Vermont Avenue, KAP 364F
Los Angeles, CA 90089-0253
United States

University of Southern California ( email )

Los Angeles, CA 90089
United States

Trinity College, Cambridge ( email )

United Kingdom

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