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

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Author Info

  • 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.

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File URL: http://www.dss.uniroma1.it/RePec/sas/wpaper/20124_Franchi_Paruolo.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome in its series DSS Empirical Economics and Econometrics Working Papers Series with number 2012/4.

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Length: 8 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:sas:wpaper:20124

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Keywords: DSGE; VAR; invertibility; non-fundamentalness.;

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References

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  1. Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers 127, Federal Reserve Bank of Minneapolis.
  2. 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.
  3. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2009. "Fiscal Foresight and Information Flows," NBER Working Papers 14630, National Bureau of Economic Research, Inc.
  4. 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.
  5. Marco Lippi & Lucrezia Reichlin, 1994. "VAR analysis, non-fundamental representations, Blashke matrices," ULB Institutional Repository 2013/10151, ULB -- Universite Libre de Bruxelles.
  6. 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.
  7. Federico Ravenna, 2006. "Vector autoregressions and reduced form representations of DSGE models," Banco de Espa�a Working Papers 0619, Banco de Espa�a.
  8. S�ren Johansen, 2009. "Representation of Cointegrated Autoregressive Processes with Application to Fractional Processes," Econometric Reviews, Taylor & Francis Journals, vol. 28(1-3), pages 121-145.
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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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