FRACTIONAL INTEGRATION AND IMPULSE RESPONSES: A BIVARIATE APPLICATION TO REAL OUTPUT IN THE US AND THE SCANDINAVIAN COUNTRIES

Guglielmo Maria Caporale and Luis Gil-Alana

Economics and Finance Discussion Papers from Economics and Finance Section, School of Social Sciences, Brunel University

Abstract: This paper analyses impulse response functions in the context of vector fractionally integrated time series. We derive analytically the restrictions required to identify the structural-form system. As an illustration of the recommended procedure, we also carry out an empirical application based on a bivariate system including real output in the US and, in turn, in one of four Scandinavian countries (Denmark, Finland, Norway and Sweden). The empirical results appear to be sensitive to some extent to the specification of the stochastic process driving the disturbances, but generally a positive shock to US output has a positive effect on the Scandinavian countries which tends to disappear in the long run.

Pages: 23 pages
Date: 2006-10
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