The importance of long run structure for impulse response analysis in VAR models

This paper demonstrates that how we identify the long run of the VAR model, as captured by the cointegrating vectors, affects identification of the impulse response functions. An application to monetary policy in the UK and the US shows that to resolve anomalies about the empirical effect of monetary policy shocks, such as the "price puzzle", we should consider the long run structure of the VAR in addition to the set of identifying restrictions imposed on the contemporaneous relations. This contrasts previous work that is traditionally confined to VAR models estimated in levels of the variables.