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A, B, C’s (And D’s) For Understanding VARS

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  • Jesus Fernandez-Villaverde

    ()
    (Department of Economics, University of Pennsylvania)

  • Juan F. Rubio-Ramirez

    ()
    (Federal Reserve Bank of Atlanta)

  • Thomas J. Sargent

    ()
    (New York University and Hoover Institution)

Abstract

The dynamics of a linear (or linearized) dynamic stochastic economic model can be expressed in terms of matrices (A,B,C,D) that define a state space system. An associated state space system (A,K,C, Sigma) determines a vector autoregression for observables available to an econometrician. We review circumstances under which the impulse response of the VAR resembles the impulse response associated with the economic model. We give four examples that illustrate a simple condition for checking whether the mapping from VAR shocks to economic shocks is invertible. The condition applies when there are equal numbers of VAR and economic shocks.

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 05-018.

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Length: 49 pages
Date of creation: 02 May 2005
Date of revision:
Handle: RePEc:pen:papers:05-018

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Keywords: VARs ; Invertibility; Estimation of Dynamic Equilibrium Models; economic shocks; innovations;

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  1. Matching Theory and Data: Bayesian Vector Autoregression and Dynamic Stochastic General Equilibrium Models
    by Christian Zimmermann in NEP-DGE blog on 2009-09-27 01:45:04
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  1. Advanced Monetary Theory and Policy (ECON 447)

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