Exogeneity, Causality, and Co-Breaking in Economic Policy Analysis of a Small Econometric Model of Money in the U.K

Since the objective of economic policy is to change target variables in the DGP, when economic policy analysis uses an econometric model, it is important that the model delivers reliable inferences about policy responses in the DGP. This requires that the model be congruent and encompassing; and hence exogeneity, causality, cointegration, co-breaking, and invariance all play major roles. We discuss these roles in linear cointegrated VARs, prior to illustrating their importance in a bivariate model of money and interest rates in the U.K. over the last century