Impulse response analysis of cointegrated systems

Abstract

Impulse response or dynamic multiplier analysis of vector autoregressive systems with cointegrated variables is considered. The asymptotic distribution of the responses estimated with Johansen's (1988) maximum likelihood procedure is derived. The results are illustrated with an analysis of a West German money demand system. The investigation shows that a direct interpretation of the cointegration relations may be difficult or misleading. Thereby the virtue of impulse response analysis for applied work is illustrated.