Identification of the short-run structure The identified cointegration relations are kept fixed at...
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Identification of the short-run structure
• The identified cointegration relations are kept fixedat their previously estimated values • An identified structure should satisfy generic, empirical, and economic identification • Similar to long-run identification with one exception:• The residual covariance matrix plays an important role
How is all this connected to the ‘traditional’ idea ofidentifying a simultaneous equation system?
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Formulating identifying restrictions
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Interpreting shocks
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Which questions?
The ‘current effects’ VAR model:
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• Role of ceteris paribus• one or several competing theory models• the empirical richness of the VAR contra its theoretical ‘looseness’• the empirical irrelevance of many theory models
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Example: Dornbush overshooting model
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Questions to be asked in our money-demand example
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Interpreting the VAR
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Why are residuals correlated?
1. Causal chain effects get blurred when data are temporally aggregated
2. Expectations are inadequately modelled by the VAR model3. Omitted variable effects
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A ’structural’ model
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Four identification schemes
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Restrictions on the reduced form model
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The triangular form VAR
• Assumes a causal ordering of the variables
• The choice of ordering is generally subjective
• Sensitivity of the empirical results to the choice
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Imposing general restrictions on the simultaneous effects
• Generic, empirical and economic identification
• Can we always achieve generic identification?• generic and empirical identification?• What about instrumental variables?
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The rank indices of structure S1 and S2
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The estimated results show that:
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A partial system:
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Economic identification
• Is money stock adjusting to money demand or supply?
• Is money causing prices or Are prices causing money?
• Given the empirically stable money demand relation found in the Danish data, can inflation be effectively controlled by the central bank?
• Does excess money, defined here as the deviation from the long-run money demand relation cause inflation?