Identification, long-run relations, and fundamental innovations in a simple cointegrated system

William J. Crowder, Dennis Hoffman, Robert H. Rasche

Research output: Contribution to journalArticlepeer-review

22 Scopus citations


This paper examines the roles played by innovations identified from a simple four-variable VAR characterized by cointegration. Using knowledge of cointegration rank and "textbook" relations that link macroeconomic aggregates, we identify distinct "real" and "nominal" innovations that dictate the long-run behavior of the model. We also examine the explanatory power of transitory innovations that are orthogonal to these permanent shocks. One of the permanent shocks displays all the characteristics of a technology or "supply" innovation, while one of the transitory innovations - identified by imposing short-run price rigidity - is interpretable as a "demand" side impulse. The permanent nominal shock bears the imprint of an innovation in aggregate inflation expectations. Historical decomposition and comparison with variables that are external to the model reveals the relative importance of the shocks at various episodes.

Original languageEnglish (US)
Pages (from-to)109-121
Number of pages13
JournalReview of Economics and Statistics
Issue number1
StatePublished - Feb 1999

ASJC Scopus subject areas

  • Social Sciences (miscellaneous)
  • Economics and Econometrics


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