1. Identification of the short-run structure The identified cointegration relations are kept fixed at their previously estimated values An identified structure should satisfy generic, empirical, and economic identification Similar to long-run identification with one exception: The residual covariance matrix plays an important role How is all this connected to the ‘traditional’ idea of identifying a simultaneous equation system?

2. Formulating identifying restrictions

3. Interpreting shocks

4. Which questions? The ‘current effects’ VAR model:

7. Role of ceteris paribus one or several competing theory models the empirical richness of the VAR contra its theoretical ‘looseness’ the empirical irrelevance of many theory models

8. Example: Dornbush overshooting model

9. Questions to be asked in our money- demand example

10. Interpreting the VAR

12. Why are residuals correlated? 1.Causal chain effects get blurred when data are temporally aggregated 2.Expectations are inadequately modelled by the VAR model 3.Omitted variable effects

15. A ’structural’ model

16. Four identification schemes

17. Restrictions on the reduced form model

20. The triangular form VAR Assumes a causal ordering of the variables The choice of ordering is generally subjective Sensitivity of the empirical results to the choice

23. Imposing general restrictions on the simultaneous effects Generic, empirical and economic identification Can we always achieve generic identification? generic and empirical identification? What about instrumental variables?

28. The rank indices of structure S1 and S2

31. The estimated results show that:

32. A partial system:

33. Economic identification Is money stock adjusting to money demand or supply? Is money causing prices or Are prices causing money? Given the empirically stable money demand relation found in the Danish data, can inflation be effectively controlled by the central bank? Does excess money, defined here as the deviation from the long-run money demand relation cause inflation?