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A Review of Nonfundamentalness and Identification in Structural VAR Models

  • Lucia Alessi
  • Matteo Barigozzi
  • Marco Capasso

We review, under a historical perspective, the developement of the problem of non- fundamentalness of Moving Average (MA) representations of economic models, starting from the work by Hansen and Sargent [1980]. Nonfundamentalness typically arises when agents' information space is larger than the econometrican's one. Therefore it is impos- sible for the latter to use standard econometric techniques, as Vector AutoRegression (VAR), to estimate economic models. We re-state the conditions under which it is pos- sible to invert an MA representation in order to get an ordinary VAR, and we consider how the latter is used in the literature to assess the validity of Dynamic Stochastic Gen- eral Equilibrium models, providing some interesting examples. We believe that possible nonfundamental representations of considered models are too often neglected in the liter- ature. We consider how factor models can be seen as an alternative to VAR for assessing the validity of an economic model without having to deal with the problem of nonfun- damentalness. We then review the works by Lippi and Reichlin [1993] and Lippi and Reichlin [1994] which are the first attempts to give to nonfundamental representations the economic relevance that they deserve, and to outline a method to obtain such repre- sentations starting from an estimated VAR.

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Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2007/22.

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Date of creation: 01 Oct 2007
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Handle: RePEc:ssa:lemwps:2007/22
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  24. Carlo Favero & Francesco Giavazzi, 2007. "Debt and the effects of fiscal policy," Working Papers 07-4, Federal Reserve Bank of Boston.
  25. Domenico Giannone & Lucrezia Reichlin, 2006. "Does information help recovering structural shocks from past observations?," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 455-465, 04-05.
  26. Andreas Beyer & Roger E. A. Farmer, 2007. "Testing for Indeterminacy: An Application to U.S. Monetary Policy: Comment," American Economic Review, American Economic Association, vol. 97(1), pages 524-529, March.
  27. University of California & Giacomo Rondina, 2008. "Incomplete Information and Informative Pricing: Theory and Application," 2008 Meeting Papers 981, Society for Economic Dynamics.
  28. Lippi, Marco & Reichlin, Lucrezia, 1994. "VAR analysis, nonfundamental representations, blaschke matrices," Journal of Econometrics, Elsevier, vol. 63(1), pages 307-325, July.
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