26 Pages Posted: 27 Aug 2008
Date Written: February 4, 2008
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: 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