Structural identification of permanent shocks in VEC models: A generalization

An econometric procedure to identify the permanent shocks in vector error c orrection models is proposed, which allows one to combine long-run and cont emporaneous restrictions. This procedure is applied to the six-variable mod el of King, Plosser, Stock and Watson (1991) with a view to providing an al ternative interpretation to their results based on a different identificati on scheme. We argue that a real spending shock in the place of the real int erest rate shock appears to better accommodate their empirical findings.