Impulse Response Analysis with Long Run Restrictions on Error Correction Models
Kyungho Jang · RePEc: Research Papers in Economics · 2001
This paper investigates impulse response analysis with long-run restrictions on vector error-correction models (VECMs), where cointegrating vectors are not necessarily identified. Structural shocks are decomposed into permanent and transitory components. Long-run identifying restrictions are imposed on the long-run effects of permanent shocks. King, Plosser, Stock, and Watson (1991) discussed a method of identification by means of long-run restrictions on the VECM. This paper adopts an alternative approach with minimal assumptions; it shows that impulse response analysis can be investigated without identifying cointegrating vectors, and accordingly relaxes the assumptions. The method can generally be applied to many empirical studies, even when cointegrating vectors are barely identified. Moreover, this paper considers identification of a block recursive system, in which permanent shocks are partially identified using long-run restrictions. The block recursive system has been well discussed with respect to structural vector autoregressive models (VARs) and structural VECMs with short-run restrictions, yet it has not been thoroughly studied in structural VECMs with long-run restrictions.