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Discussion Papers
Abstract
Examples of simple economic theory models are analyzed as restrictions on the Cointegrated VAR (CVAR). This establishes a correspondence between basic economic concepts and the econometric concepts of the CVAR: The economic relations correspond to cointegrating vectors and exogeneity in the economic model implies the econometric concept of strong exogeneity for β. The economic equilibrium corresponds to the so-called long-run value (Johansen 2005), the comparative statics are captured by the long-run impact matrix, C; and the exogenous variables are the common trends. Also, the adjustment parameters of the CVAR are shown to be interpretable in terms of expectations formation, market clearing, nominal rigidities, etc. The general-partial equilibrium distinction is also discussed.
Paper submitted to the special issue “Using Econometrics for Assessing Economic Models” edited by Katarina Juselius.
“Bridging Economic Theory Models and the Cointegrated Vector Autoregressive Model” by Niels Framroze Møller - Anonymous - June 30, 2008 - 13:51
I think this is an interesting paper that considers the connection between state-of-the-art econometric models and economic theory/models, and this is an important issue.
I was interested in the discussion regarding the imposition of unit roots as an approximation. The statement that the true process generating the exogenous variables ...[more]
... is stationary but generates persistent behaviour made me think of the concept of fractional integration where the d-th difference for d∈(0,0.5) is stationary but has long memory. I don’t know what the implications would be for the CVAR if such processes were modelled but I wondered whether this would make for an interesting extension?
Fractional cointegration extension - Niels Framroze Møller - July 07, 2008 - 10:39
Thanks. Without knowing much about fractional integration I thought about this loosely also. Intuitively it seems to fit into my framework. Perhaps other participants have any suggestions, comments or references.