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Economic and VAR Shocks: What Can Go Wrong?

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Author Info
Jesús Fernández-Villaverde
Juan F. Rubio-Ramírez

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Abstract

This paper discusses the problem of invertibility between the economic shocks in a dynamic equilibrium model and the corresponding VAR innovations. We present an algebraic check of invertibility based on the model fundamentals and we find the identification scheme that recovers the economic shocks from the VAR innovations when the model is invertible. We illustrate our results with a model of the Great Depression proposed by Christiano, Motto, and Rostagno (2003). (JEL: E00, E32, C32) (c) 2006 by the European Economic Association.

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File URL: http://www.mitpressjournals.org/doi/pdfplus/10.1162/jeea.2006.4.2-3.466
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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 4 (2006)
Issue (Month): 2-3 (04-05)
Pages: 466-474
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Handle: RePEc:tpr:jeurec:v:4:y:2006:i:2-3:p:466-474

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  1. Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent, 2005. "A,B,C's (and D's)'s for Understanding VARS," Levine's Bibliography 172782000000000096, UCLA Department of Economics. [Downloadable!]
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  2. Uhlig, H., 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper 97, Tilburg University, Center for Economic Research. [Downloadable!]
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  3. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2003. "The Great Depression and the Friedman-Schwartz hypothesis," Proceedings, Federal Reserve Bank of Cleveland, pages 1119-1215.
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  4. Christiano, Lawrence J, 1990. "Linear-Quadratic Approximation and Value-Function Iteration: A Comparison," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 99-113, January.
  5. Lars Peter Hansen & Thomas J. Sargent, 1993. "Recursive linear models of dynamic economies," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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