Identification Methods in Vector‐Error Correction Models: Equivalence Results

16 Pages Posted: 10 Dec 2013

See all articles by Lance A. Fisher

Lance A. Fisher

Macquarie University - Department of Economics; Macquarie University, Macquarie Business School

Hyeon‐Seung Huh

Yonsei University - Department of Economics

Date Written: February 2014

Abstract

In a structural vector‐error correction (VEC) model, it is possible to decompose the shocks into those with permanent and transitory effects on the levels of the variables. Pagan and Pesaran derive the restrictions which the permanent–transitory decomposition of the shocks imposes on the structural VEC model. This paper shows that these restrictions are equivalent to a set of restrictions that are applied in the methods of Gonzalo and Ng and King et al. (KPSW). Using this result, it is shown that the Pagan and Pesaran method can be used to recover the structural shocks with permanent effects identically to those from the Gonzalo and Ng and KPSW methods. In the former case, this is illustrated in the context of Lettau and Ludvigson's consumption model and in the latter case in KPSW's six variable model. There are also two other methods for which the Pagan and Pesaran approach can deliver identical permanent shocks which are also discussed.

Keywords: Permanent shocks, Structural identification, Structural vector‐error correction models

Suggested Citation

Fisher, Lance A. and Huh, Hyeon-Seung, Identification Methods in Vector‐Error Correction Models: Equivalence Results (February 2014). Journal of Economic Surveys, Vol. 28, Issue 1, pp. 1-16, 2014, Available at SSRN: https://ssrn.com/abstract=2365958 or http://dx.doi.org/10.1111/j.1467-6419.2012.00734.x

Lance A. Fisher (Contact Author)

Macquarie University - Department of Economics ( email )

Sydney NSW 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Hyeon-Seung Huh

Yonsei University - Department of Economics ( email )

50 Yonsei-Ro
Seoul, 120-749
Korea

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