International Finance Discussion Papers (IFDP)
June 1998
Exogeneity, Cointegration, and Economic Policy Analysis
Neil R. Ericsson, David F. Hendry, and Grayham E. Mizon
Abstract:
This overview examines conditions for reliable economic policy analysis based on econometric models, focusing on the econometric concepts of exogeneity, cointegration, causality, and invariance. Weak, strong, and super exogeneity are discussed in general; and these concepts are then applied to the use of econometric models in policy analysis when the variables are cointegrated. Implications follow for model constancy, the Lucas critique, equation inversion, and impulse response analysis. A small money-demand model for the United Kingdom illustrates the main analytical points. This paper then summarizes the other articles in this special section of the Journal of Business and Economic Statistics on "Exogeneity, Cointegration, and Economic Policy Analysis."
Full paper (2207 KB Postscript)Keywords: Causality, equation inversion, impulse response analysis, invariance, Lucas critique, money demand
PDF: Full Paper
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