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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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  1. Jesús Fernández-Villaverde & Juan Francisco Rubio-Ramírez & Thomas J. Sargent, 2005. "A, B, C’s, (and D’s) for understanding VARs," FRB Atlanta Working Paper 2005-09, Federal Reserve Bank of Atlanta.
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  4. Boivin, J. & Giannoni, M., 2007. "DSGE Models in a Data-Rich Environment," Working papers 162, Banque de France.
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  6. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2008. "Explaining The Great Moderation: It Is Not The Shocks," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 621-633, 04-05.
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  9. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
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  12. Galí, Jordi, 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," CEPR Discussion Papers 1499, C.E.P.R. Discussion Papers.
  13. Giannone, Domenico & Reichlin, Lucrezia, 2006. "Does Information Help Recovering Structural Shocks from Past Observations?," CEPR Discussion Papers 5725, C.E.P.R. Discussion Papers.
  14. Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2006. "VARs, common factors and the empirical validation of equilibrium business cycle models," ULB Institutional Repository 2013/10127, ULB -- Universite Libre de Bruxelles.
  15. Forni, Mario & Giannone, Domenico & Lippi, Marco & Reichlin, Lucrezia, 2009. "Opening The Black Box: Structural Factor Models With Large Cross Sections," Econometric Theory, Cambridge University Press, vol. 25(05), pages 1319-1347, October.
  16. Klaeffling, Matt, 2003. "Monetary policy shocks - a nonfundamental look at the data," Working Paper Series 0228, European Central Bank.
  17. Catherine Doz & Domenico Giannone & Lucrezia Reichlin, 2012. "A Quasi Maximum Likelihood Approach for Large, Approximate Dynamic Factor Models," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00638440, HAL.
  18. Blanchard, Olivier Jean & Quah, Danny, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Reply," American Economic Review, American Economic Association, vol. 83(3), pages 653-58, June.
  19. Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005. "Monetary Policy in Real Time," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 161-224 National Bureau of Economic Research, Inc.
  20. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-40, September.
  21. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2005. "A critique of structural VARs using real business cycle theory," Working Papers 631, Federal Reserve Bank of Minneapolis.
  22. Futia, Carl A, 1981. "Rational Expectations in Stationary Linear Models," Econometrica, Econometric Society, vol. 49(1), pages 171-92, January.
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  25. Marco Lippi & Lucrezia Reichlin, 1994. "VAR analysis, non-fundamental representations, Blashke matrices," ULB Institutional Repository 2013/10151, ULB -- Universite Libre de Bruxelles.
  26. Kenneth Kasa, 1995. "Signal extraction and the propagation of business cycles," Working Papers in Applied Economic Theory 95-14, Federal Reserve Bank of San Francisco.
  27. Kenneth Kasa & Todd B. Walker & Charles H. Whiteman, 2006. "Asset Prices in a Time Series Model with Perpetually Disparately Informed, Competitive Traders," Caepr Working Papers 2006-010, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  28. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2008. "Fiscal Foresight: Analytics and Econometrics," NBER Working Papers 14028, National Bureau of Economic Research, Inc.
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  30. Gamber, Edward N & Joutz, Frederick L, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(5), pages 1387-93, December.
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