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A, B, C's (and D)'s for Understanding VARs

  • Jesus Fernandez-Villaverde
  • Juan Rubio-Ramirez
  • Thomas J. Sargent

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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File URL: http://www.nber.org/papers/t0308.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0308.

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Date of creation: Jun 2005
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Publication status: published as Jesús Fernández-Villaverde, Juan F. Rubio-Ramírez, Thomas J. Sargent, and Mark W. Watson, 2007. "ABCs (and Ds) of Understanding VARs," American Economic Review, vol. 97(3), pages 1021-1026.
Handle: RePEc:nbr:nberte:0308
Note: TWP
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