Co‐Integrating VAR Models and Economic Policy

14 Pages Posted: 10 Dec 2013

See all articles by Francesco Carlucci

Francesco Carlucci

University of Rome I - Department of Public Economics

Francesco Montaruli

Bank of Italy

Date Written: February 2014

Abstract

This paper surveys some relevant contributions to the economic literature on co‐integrating vector autoregressive (VAR) models [vector error correction mechanisms (VECMs)], emphasizing their usefulness for economic policy. It further discusses some theoretical aspects that are necessary for a complete understanding of their potential. The theoretical introduction of the co‐integrating VAR model is followed by an illustration of its applications to monetary policy, fiscal policy and exchanges rates as well as in establishing the effects of structural bilateral shocks between countries (the so‐called global VAR, or GVAR, models). Special attention is paid to the VECM capacities of being used in conjunction with dynamic stochastic general equilibrium models and of jointly specifying the short‐ and long‐run dynamics, thus representing the steady‐state of economic systems (by means of the co‐integration relations) and the short‐run dynamics around it.

Keywords: VAR models, Co‐integration, Monetary policy, Fiscal policy, GVAR models, Short and not Short‐ and long run

Suggested Citation

Carlucci, Francesco and Montaruli, Francesco, Co‐Integrating VAR Models and Economic Policy (February 2014). Journal of Economic Surveys, Vol. 28, Issue 1, pp. 68-81, 2014. Available at SSRN: https://ssrn.com/abstract=2365961 or http://dx.doi.org/10.1111/j.1467-6419.2012.00740.x

Francesco Carlucci (Contact Author)

University of Rome I - Department of Public Economics ( email )

via del Castro Laurenziano, 9
Rome, RM 00161
Italy

Francesco Montaruli

Bank of Italy ( email )

No Address Available

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