← Search

Identification, Long-Run Relations, and Fundamental Innovations in a Simple Cointegrated System

William J. Crowder¹; Dennis L. Hoffman²; Robert H. Rasche³

¹ The University of Texas at Arlington · ² Arizona State University · ³ Federal Reserve Bank of St. Louis

This paper examines the roles played by innovations identified from a simple four-variable VAR characterized by cointegration. Using knowledge of cointegration rank and “textbook” relations that link macroeconomic aggregates, we identify distinct “real” and “nominal” innovations that dictate the long-run behavior of the model. We also examine the explanatory power of transitory innovations that are orthogonal to these permanent shocks. One of the permanent shocks displays all the characteristics of a technology or “supply” innovation, while one of the transitory innovations—identified by imposing short-run price rigid-ity—is interpretable as a “demand” side impulse. The permanent nominal shock bears the imprint of an innovation in aggregate inflation expectations. Historical decomposition and comparison with variables that are external to the model reveals the relative importance of the shocks at various episodes.

DOI

10.1162/003465399767923863

Volume

81 (1)

Pages

109-121

Language

en

Export

BibTeX

Sources

openalex crossref