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Abstract
The objective of this paper is to apply the method developed in Garratt, Lee, Pesaran, and Shin (2000) to build a structural model for Germany with a transparent and theoretically coherent foundation. The modelling strategy consists of a set of long-run structural relationships suggested by economic theory and an otherwise unrestricted VAR model. It turns out that we can rebuild the structure of the model in Garratt, Lee, Pesaran, and Shin (2003b) for German data. Five long run relations: PPP, UIP, production function, trade balance, and real money balance characterize the equilibrium state of Germany as an open economy in our structural model.
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Comments and Questions
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Invitation to resubmit a revised version.
The study replicates a previous UK study and uses the same modelling approach. The comments of the two readers circle in on both replication and modelling. One raises structural breaks as a potential problem for the analysis, and is generally concerned about
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the used German data. The other suggests that the length of the paper could be reduced as it contains nothing substantially new except for the data and the empirical results.
I see both sets of views as highly relevant and urge you to account for these views in revising the paper. Both readers have some additional comments that should also be accounted for.
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