| By: |
Lucia Alessi (Laboratory of Economics and Management (LEM), Sant’Anna School of Advanced Studies, Piazza Martiri della Libertà, 33, 56127 Pisa, Italy.);
Matteo Barigozzi (Max Planck Institute of Economics, Kahlaische Strasse, 10, 07745 Jena, Germany.);
Marco Capasso (Urban & Regional research centre Utrecht (URU), Faculty of Geosciences, Utrecht University, and Tjalling C. Koopmans Institute (TKI), Utrecht School of Economics, Utrecht University, The Netherlands.) |
| Abstract: |
We review, under a historical perspective, the development of the problem of
nonfundamentalness of Moving Average (MA) representations of economic models.
Nonfundamentalness typically arises when agents’ information space is larger
than the econometrician’s one. Therefore it is impossible for the latter to
use standard econometric techniques, as Vector AutoRegression (VAR), to
estimate economic models. We restate the conditions under which it is possible
to invert an MA representation in order to get an ordinary VAR and identify
the shocks, which in a VAR are fundamental by construction. By reviewing the
work by Lippi and Reichlin [1993] we show that nonfundamental shocks may be
very different from fundamental shocks. Therefore, nonfundamental
representations should not be ruled out by assumption and indeed methods to
detect nonfundamentalness have been recently proposed in the literature.
Moreover, Structural VAR (SVAR) can be legitimately used for assessing the
validity of Dynamic Stochastic General Equilibrium models only if the
representation associated with the economic model is fundamental. Factor
models can be an alternative to SVAR for validation purposes as they do not
have to deal with the problem of nonfundamentalness. JEL Classification: C32,
C51, C52. |
| Keywords: |
Nonfundamentalness, Structural VAR, Dynamic Stochastic General Equilibrium Models, Factor Models. |
| Date: |
2008–07 |
| URL: |
http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080922&r=ets |