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On ABCs (and Ds) of VAR representations of DSGE models

Author

Listed:
  • Massimo Franchi

    ("Sapienza" Universita' di Roma)

  • Paolo Paruolo

    (Universita' dell'Insubria)

Abstract

This paper shows that the poor man's invertibility condition in Fernandez-Villaverde et al. (2007) is, in general, sufficient but not necessary for fundamentalness; that is, a violation of this condition does not necessarily imply the impossibility of recovering the structural shocks of a DSGE via a VAR. The permanent income model in Fernandez-Villaverde et al. (2007) is used to illustrate this fact. A necessary and sufficient condition for fundamentalness is formulated and its relations with the poor man's invertibility condition are discussed.

Suggested Citation

  • Massimo Franchi & Paolo Paruolo, 2012. "On ABCs (and Ds) of VAR representations of DSGE models," DSS Empirical Economics and Econometrics Working Papers Series 2012/4, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
    • Handle: RePEc:sas:wpaper:20124
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    References listed on IDEAS

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    1. Eric R. Sims, 2012. "News, Non-Invertibility, and Structural VARs," Advances in Econometrics, in: DSGE Models in Macroeconomics: Estimation, Evaluation, and New Developments, pages 81-135, Emerald Group Publishing Limited.
    2. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez & Thomas J. Sargent & Mark W. Watson, 2007. "ABCs (and Ds) of Understanding VARs," American Economic Review, American Economic Association, vol. 97(3), pages 1021-1026, June.
    3. Lippi, Marco & Reichlin, Lucrezia, 1994. "VAR analysis, nonfundamental representations, blaschke matrices," Journal of Econometrics, Elsevier, vol. 63(1), pages 307-325, July.
    4. Ravenna, Federico, 2007. "Vector autoregressions and reduced form representations of DSGE models," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2048-2064, October.
    5. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
    6. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2007. "Assessing Structural VARs," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 1-106, National Bureau of Economic Research, Inc.
    7. Eric M. Leeper & Todd B. Walker & Shu‐Chun Susan Yang, 2013. "Fiscal Foresight and Information Flows," Econometrica, Econometric Society, vol. 81(3), pages 1115-1145, May.
    8. Søren Johansen, 2009. "Representation of Cointegrated Autoregressive Processes with Application to Fractional Processes," Econometric Reviews, Taylor & Francis Journals, vol. 28(1-3), pages 121-145.
    9. Christopher Otrok & Andre Kurmann, 2011. "News Shocks and the Term Structure of Interest Rates: A Challenge for DSGE Models," 2011 Meeting Papers 426, Society for Economic Dynamics.
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    Cited by:

    1. Massimo Franchi & Anna Vidotto, 2012. "A simple check for VAR representations of DSGE models," DSS Empirical Economics and Econometrics Working Papers Series 2012/5, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
    2. Warne, Anders & Coenen, Günter & Christoffel, Kai, 2013. "Predictive likelihood comparisons with DSGE and DSGE-VAR models," Working Paper Series 1536, European Central Bank.

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    Keywords

    DSGE; VAR; invertibility; non-fundamentalness.;
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