In their VAR model, Blanchard and Quah (BQ, 1989) employed uncorrelatedness between Aggregate Supply (AS) and Aggregate Demand (AD) shocks and the long-run output neutrality condition as identifying assumptions. This article conducts a simple Monte Carlo experiment to gauge how well the BQ procedure can approximate the true structure if the underlying assumptions of uncorrelatedness and long-run output neutrality are not supported by data.
Bibliographical noteFunding Information:
I thank the referee for the helpful input and the Department of Economics at the University of Washington for their generous hospitality. This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2010-013-B00007).
All Science Journal Classification (ASJC) codes
- Economics and Econometrics