This paper examines the dynamic impact of a dummy variable in the Koyck distributed-lag model. It demonstrates that the impact may not diministh exponentially as implied by the model. In many cases the impact may be short-lived, lasting for one period, and thus require the addition of a one-period restricted lagged dummy in the model. To illustrate, four impact functions are estimated and compared using two empirical examples. Implications for other dynamic models with one or more lagged dependent variables are also explored. Keywords: dummy functions, distributed lags, Koyck model, dynamic specifications. * The author is thankful to Ping-Wen Chiu and Chueh-Chuan Pan for research assistance, Nancy Zignumd for editorial improvements, and Ray Chow of Academia Sinica and three anonymous referees for helpful comments.
