I gratefully acknowledge the financial support provided by the research department of the Bank of Finland to carry out this work. The paper has benefited from numerous valuable comments by two anonymous referees, Søren Johansen, Katarina Juselius, Moshe Kim, Antti Ripatti, and the participants of the department's research seminars. I bear sole responsibility for all remaining errors and omissions.
Testing Steady-State Restrictions of Linear Rational Expectations Models when Data are Highly Persistent*
Version of Record online: 21 FEB 2011
© Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2011
Oxford Bulletin of Economics and Statistics
Volume 73, Issue 3, pages 315–334, June 2011
How to Cite
Juselius, M. (2011), Testing Steady-State Restrictions of Linear Rational Expectations Models when Data are Highly Persistent. Oxford Bulletin of Economics and Statistics, 73: 315–334. doi: 10.1111/j.1468-0084.2010.00629.x
- Issue online: 4 APR 2011
- Version of Record online: 21 FEB 2011
- Final Manuscript Received: September 2010
Steady-state restrictions are commonly imposed on highly persistent variables to achieve stationarity prior to confronting rational expectations models with data. However, the resulting steady-state deviations are often surprisingly persistent indicating that some aspects of the underlying theory may be empirically problematic. This paper discusses how to formulate steady-state restrictions in rational expectations models with latent forcing variables and test their validity using cointegration techniques. The approach is illustrated by testing steady-state restrictions for alternative specifications of the New Keynesian model and shown to be able to discriminate between different assumptions on the sources of the permanent shocks.