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Measurement with minimal theory

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  • Ellen R. McGrattan

Abstract

Applied macroeconomists interested in identifying the sources of business cycle fluctuations typically have no more than 40 or 50 years of data at a quarterly frequency. With sample sizes that small, identifi cation may not be possible even with correctly specifi ed representations of the data. In this article, I investigate whether small samples are indeed a problem for some commonly used statistical representations. I compare three—a vector autoregressive moving average (VARMA), an unrestricted state space, and a restricted state space—that are all consistent with the same prototype business cycle model. The statistical representations that I consider differ in the amount of a priori theory that is imposed, but all are correctly specifi ed. I fi nd that the identifying assumptions of VARMAs and unrestricted state space representations are too minimal: the range of estimates for statistics of interest for business cycle researchers is so large as to be uninformative.

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Bibliographic Info

Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (2010)
Issue (Month): July ()
Pages: 2-13

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Handle: RePEc:fip:fedmqr:y:2010:i:july:p:2-13:n:v.33no.1

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  1. Burmeister, Edwin & Wall, Kent D & Hamilton, James D, 1986. "Estimation of Unobserved Expected Monthly Inflation Using Kalman Filtering," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(2), pages 147-60, April.
  2. V V Chari & Patrick J Kehoe & Ellen R. McGrattan, 2003. "Business Cycle Accounting," Levine's Bibliography 506439000000000421, UCLA Department of Economics.
  3. Hannan, E J, 1976. "The Identification and Parameterization of ARMAX and State Space Forms," Econometrica, Econometric Society, vol. 44(4), pages 713-23, July.
  4. Harald Uhlig, 1998. "A Toolkit for Analysing Nonlinear Dynamic Stochastic Models Easily," QM&RBC Codes 123, Quantitative Macroeconomics & Real Business Cycles.
  5. Chari, V.V. & Kehoe, Patrick J. & McGrattan, Ellen R., 2008. "Are structural VARs with long-run restrictions useful in developing business cycle theory?," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1337-1352, November.
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Cited by:
  1. Christian Kascha & Karel Mertens, 2006. "Business Cycle Analysis and VARMA models," Economics Working Papers ECO2006/37, European University Institute.

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