Monetary and Economic Studies Vol.16, No.1 / May 1998

Nonstationary Time-Series Modeling versus Structural Equation Modeling: With an Application to Japanese Money Demand

Cheng Hisao, Hiroshi Fujiki

The issues of identification, estimation, and statistical inferences of nonstationary time series and simultaneous equation models are reviewed. It is shown that prior information matters and the advantage of dichotomization of the traditional autoregressive distributed lag model into the long-run equilibrium relation and the short-run dynamic adjustment process as an empirical modeling device may be exaggerated. A Japanese money demand study is used to illustrate that a direct approach yields a more stable long-run and short-run relationship and has better predictive power than the approach of letting the data determine the long-run relationship and modeling the short-run dynamics as an adjustment of the deviation from its equilibrium position.

Keywords: Nonstationary time series; Structural model; Identi-fication; Estimation; Prior information

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 1998 Bank of Japan All Rights Reserved.

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