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Economic and VAR Shocks: What Can Go Wrong?

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  • Jesús Fernández-Villaverde
  • Juan F. Rubio-Ramíre
  • Thomas J. Sargent

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.econ.upenn.edu/~jesusfv/format_jeea3.pdf
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Bibliographic Info

Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000000990.

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Date of creation: 08 Dec 2006
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Handle: RePEc:cla:levrem:122247000000000990

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  1. Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent, 2005. "A, B, C’s (And D’s) For Understanding VARS," PIER Working Paper Archive 05-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Lars Peter Hansen & Thomas J. Sargent, 1990. "Recursive Linear Models of Dynamic Economies," NBER Working Papers 3479, National Bureau of Economic Research, Inc.
  3. Lawrence J. Christiano & Roberto Motto, 2004. "The Great Depression and the Friedman-Schwartz Hypothesis," Computing in Economics and Finance 2004 169, Society for Computational Economics.
  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. Uhlig, H., 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper 1995-97, Tilburg University, Center for Economic Research.
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Cited by:
  1. Linnemann, Ludger, 2009. "Macroeconomic effects of shocks to public employment," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 252-267, June.
  2. Helmut Lütkepohl, 2012. "Fundamental Problems with Nonfundamental Shocks," Discussion Papers of DIW Berlin 1230, DIW Berlin, German Institute for Economic Research.

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