A range of parameter changes in I(1) cointegrated time series are not reflected in econometric models thereof, in that many shifts are not easily detected by conventional tests. The breaks in question are changes that leave the unconditional expectations of the I(0) components unaltered. Thus, dynamics, adjustment speeds etc. may alter without detection. However, shifts in long-run means are generally noticeable. Using the VECM model class, the paper discusses such results, explains why they occur, and uses Monte Carlo experiments to illustrate the contrasting ease of detection of `deterministic' and `stochastic' shifts. 1

This paper characterizes empirically achievable limits for time series econometric modeling and forecasting. The approach involves the concept of minimal information loss in time series regression and the paper shows how to derive bounds that delimit the proximity of empirical measures to the true probability measure (the DGP) in models that are of econometric interest. The approach utilizes joint probability measures over the combined space of parameters and observables and the results apply for models with stationary, integrated, and cointegrated data. A theorem due to Rissanen is extended so that it applies directly to probabilities about the relative likelihood (rather than averages), a new way of proving results of the Rissanen type is demonstrated, and the Rissanen theory is extended to nonstationary time series with unit roots, near unit roots, and cointegration of unknown order. The corresponding bound for the minimal information loss in empirical work is shown not to be a constant, in general, but to be proportional to the logarithm of the determinant of the (possibility stochastic) Fisher-information matrix. In fact, the bound that determines proximity to the DGP is generally path dependent, and it depends specifically on the type as well as the number of regressors. For practical purposes, the

Introduction It is common in the literature on instrumental variables to remark upon the difficulty of knowing or demonstrating that a potential instrument is exogenous, in the sense of being uncorrelated with the disturbances [Bartels, 1991, Johnston, 1972]. It is also widely recognized that exogeneity is an assumption embedded in the model specification [Engle, et al, 1984], hence, it rests on subjective judgment and, like other structural assumptions of causation and "zero-restrictions", it cannot be tested in purely observational studies. The purpose of this note is to show that despite its elusive nature, exogeneity can nevertheless be given some empirical test. The test is not guaranteed to detect all violations of exogeneity but it can, in certain circumstances, screen away real bad choices of would-be instruments. 2 An Instrumental Inequality Definition 2.1 (exogeneity) A variable z is said to be exogenous relative to an ordered

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Although out-of-sample forecast performance is often deemed to be the ‘gold standard’ of evaluation, it is not in fact a good yardstick for evaluating models. The arguments are illustrated with reference to a recent paper by Carruth, Hooker and Oswald (1998), who suggest that the good dynamic forecasts of their model support the efficiency-wage theory on which it is based. Journal of Economic Literature classification: C53.

to stimulate discussion and critical comment. References in publications to International Finance Discussion Papers (other than an acknowledgment that the writer has This paper develops a constant, data-coherent, error correction model for broad money demand (M3) in Greece. This model contributes to a better understanding of the e®ects of monetary policy in Greece, and of the portfolio consequences of ¯nancial innovation in general. The broad monetary aggregate M3 was targeted until recently, and current monetary policy still uses such aggregates as guidelines, yet analysis of this aggregate has been dormant for over a decade. In spite of large °uctuations in the in°ation rate, introduction of new ¯nancial instruments, and liberalization of the ¯nancial system, the estimated model is remarkably stable. The dynamics of money demand are important, with price and income elasticities being much smaller in the short run than in the long run.

The relationship between wages, prices, productivity, inflation, and unemployment in Italy, Poland, and the UK between the 1960’s and the early 1990’s is modelled as a cointegrated vector autoregression subject to regime shifts. For each of these economies there is clear evidence of a change in the underlying equilibria of this sector of the economy. Hypotheses concerning the similarity of the transition from a rigid to a flexible labour market are tested.

Abstract: We assess the extent to which a country’s external capital structure can aid in mitigating the impact of oil price shocks on external accounts. We study two Caribbean economies highly vulnerable to oil price shocks, an oil-importer (Jamaica) and an oil-exporter (Trinidad and Tobago). From a risk-mitigation perspective, an external capital structure that, through international capital gains and losses, helps offset responses of the current account balance to external shocks is desirable. Our main finding is that both countries could alter their international portfolio to provide a better buffer against such shocks. Not surprisingly, we find that Jamaica might benefit from a more diversified official reserves portfolio that would be positively correlated with oil prices. Conversely, Trinidad and Tobago could benefit from increasing the exposure of its oil stabilization fund to assets that correlate negatively with oil prices. The authors thank Lutz Kilian for providing an update of his oil shocks series, Philip Lane and Gian Maria Milesi-