On Econometric Analysis of Structural Systems with Permanent and Transitory Shocks and Exogenous Variables

23 Pages Posted: 27 Feb 2007

See all articles by Adrian Pagan

Adrian Pagan

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

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Date Written: February 2007

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 for which there are known permanent shocks must have no error correction terms present in them, thereby freeing up the latter to be used as instruments in estimating their parameters. The proposed approach is illustrated by a re-examination of the identification scheme used in a monetary model by Wickens and Motta (2001), and in a well known paper by Gali (1992) which deals with the construction of an IS-LM model with supply-side effects. We show that the latter imposes more short-run restrictions than are needed because of a failure to fully utilize the cointegration information.

Keywords: permanent shocks, structural identification, error correction models, IS-LM models

JEL Classification: C30, C32, E10

Suggested Citation

Pagan, Adrian R. and Pesaran, M. Hashem, On Econometric Analysis of Structural Systems with Permanent and Transitory Shocks and Exogenous Variables (February 2007). CESifo Working Paper Series No. 1924, IZA Discussion Paper No. 2634, Available at SSRN: https://ssrn.com/abstract=965417

Adrian R. Pagan

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 (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

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