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Economic and VAR Shocks: What Can Go Wrong?

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

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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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
Contact details of provider: Web page: http://www.dklevine.com/

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  1. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2004. "The Great Depression and the Friedman-Schwartz hypothesis," Working Paper 0318, Federal Reserve Bank of Cleveland.
  2. Jesús Fernández-Villaverde & Juan Francisco Rubio-Ramírez & Thomas Sargent, 2005. "A, B, C’s, (and D’s) for understanding VARs," Working Paper 2005-09, Federal Reserve Bank of Atlanta.
  3. repec:dgr:kubcen:199597 is not listed on IDEAS
  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, 1990. "Recursive Linear Models of Dynamic Economies," NBER Working Papers 3479, National Bureau of Economic Research, Inc.
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