Long-run Identification in a Fractionally Integrated System

This is the latest version of this item.

Abstract

We propose an extension of structural fractionally integrated vector autoregressive models that avoids certain undesirable effects on the impulse responses that occur if long-run identification restrictions are imposed. We derive the model’s Granger representation and investigate the effects of long-run restrictions. Simulations illustrate that enforcing integer integration orders can have severe ...

Abstract

We propose an extension of structural fractionally integrated vector autoregressive models that avoids certain undesirable effects on the impulse responses that occur if long-run identification restrictions are imposed. We derive the model’s Granger representation and investigate the effects of long-run restrictions. Simulations illustrate that enforcing integer integration orders can have severe consequences for impulse responses. In a system of US real output and aggregate prices, the effects of structural shocks strongly depend on the specification of the integration orders. In the statistically preferred fractional model, shocks that are typically interpreted as demand disturbances have a very brief influence on GDP.