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PERMANENT-TRANSITORY DECOMPOSITIONS UNDER WEAK EXOGENEITY

Published online by Cambridge University Press:  06 December 2006

Lance A. Fisher  and
Hyeon-seung Huh
Lance A. Fisher
Affiliation:
University of New South Wales
Hyeon-seung Huh
Affiliation:
Yonsei University
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Abstract

This note shows that the orthogonal shocks obtained by imposing a recursive structure on the contemporaneous impacts of the errors in a vector-error correction model (VECM) are related to the orthogonal permanent-transitory shocks in a Gonzalo and Ng (2001, Journal of Economic Dynamics and Control 25, 1527–1546) decomposition provided some of the variables in the system are weakly exogenous. Specifically, when there are as many weakly exogenous variables as common trends and the weakly exogenous variables are ordered first, the orthogonal shocks obtained directly from the VECM constitute a permanent-transitory decomposition, and the permanent shocks are identical to those in the Gonzalo and Ng decomposition.We are grateful to the co-editor Paolo Paruolo and an anonymous referee for useful comments, which have helped to improve the content and exposition of this note. Financial support from the Australian Research Council is gratefully acknowledged.

Type
NOTES AND PROBLEMS
Information
Econometric Theory , Volume 23 , Issue 1 , February 2007 , pp. 183 - 189
Copyright
© 2007 Cambridge University Press

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References

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