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Detecting common dynamics in transitory components

Christensen, Timothy , Hurn, Stan, & Pagan, Adrian (2011) Detecting common dynamics in transitory components. Journal of Time Series Econometrics, 3(1), pp. 1-26.

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Abstract

This paper considers VECMs for variables exhibiting cointegration and common features in the transitory components. While the presence of cointegration between the permanent components of series reduces the rank of the long-run multiplier matrix, a common feature among the transitory components leads to a rank reduction in the matrix summarizing short-run dynamics. The common feature also implies that there exists linear combinations of the first-differenced variables in a cointegrated VAR that are white noise and traditional tests focus on testing for this characteristic. An alternative, however, is to test the rank of the short-run dynamics matrix directly. Consequently, we use the literature on testing the rank of a matrix to produce some alternative test statistics. We also show that these are identical to one of the traditional tests. The performance of the different methods is illustrated in a Monte Carlo analysis which is then used to re-examine an existing empirical study. Finally, this approach is applied to provide a check for the presence of common dynamics in DSGE models.

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ID Code: 52186
Item Type: Journal Article
Keywords: transitory components, common features, reduced rank, cointegration
DOI: 10.2202/1941-1928.1088
ISSN: 1941-1928
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Macroeconomics (incl. Monetary and Fiscal Theory) (140212)
Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > ECONOMETRICS (140300) > Econometric and Statistical Methods (140302)
Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > ECONOMETRICS (140300) > Time-Series Analysis (140305)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Copyright 2011 Walter de Gruyter
Copyright Statement: The final publication is available at www.degruyter.com
Deposited On: 19 Jul 2012 16:28
Last Modified: 26 Jul 2013 11:47

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