Long-run identifying restrictions for an error-correction model of New Zealand money, prices and output

Dynamic interactions among money, prices and output are modeled for New Zealand. We find evidence of one cointegrating relationship and two stochastic trends among these series and base structural inferences on long-run identifying restrictions of the type proposed for VEC models by King, Plosser, Stock and Watson (KPSW). Under the assumption that a monetary shock has no effect on output in the long-run, a productivity shock for which there is partial monetary accommodation explains most of the variability of output at all forecast horizons, whereas the monetary shock is the most important determinant of levels of money and prices. An alternative identifying restriction that imposes a long-run impact of a monetary shock on output results in less plausible dynamic effects.