In this paper we describe how restricted vector autoregressions can be employed to examine the sources of macroeconomic fluctuations. We show how cointegration restrictions can be used to identify a VAR system with common stochastic trends subject to transitory and permanent changes in average growth, and how we may investigate the system's responses to permanent shocks, i.e. to innovations to the trends. Theoretical cointegration vectors are derived from a small open economy growth model for terms of trade, real GDP, real consumption, and real investments. Applying these methods to Swedish annual data (1875–1986) we find that permanent real (supply) shocks account for most of the fluctuations in GDP, even in the short run.
Journal of Applied Econometrics
Stochastic Trends and Economic Fluctuations in a Small Open Economy
Journal Article
Reference
Mellander, Erik, Anders Vredin and Anders Warne (1992). “Stochastic Trends and Economic Fluctuations in a Small Open Economy”. Journal of Applied Econometrics 7(4), 369–394. doi.org/10.1002/jae.3950070405
Mellander, Erik, Anders Vredin and Anders Warne (1992). “Stochastic Trends and Economic Fluctuations in a Small Open Economy”. Journal of Applied Econometrics 7(4), 369–394. doi.org/10.1002/jae.3950070405
Authors
Erik Mellander, Anders Vredin,
Anders Warne