IDENTIFICATION OF THE LONG-RUN AND THE SHORT-RUN STRUCTURE - AN APPLICATION TO THE ISLM MODEL

In this paper we discuss the problem of identification in a model with cointegration. It is pointed out that there is an identification prob lem for both long-run parameters and short-run parameters. The identif ication of the equations and the cointegrating relations is achieved b y linear restrictions on the parameters and a criterion for a statisti cal model to be identifying is given. We also define empirical identif ication of an estimated structure. A switching algorithm for calculati ng the restricted parameters is proposed. The concepts are illustrated with an empirical analysis of the ISLM model using Australian monetar y data.