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On the Fundamentalness of Nonfundamentalness in DSGE Models

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Abstract

This note warns against the use of noncausal VARs as a reliable test for indeterminacy. By means of a simple example, we show that determinate models may well entail nonfundamental ARMA equilibrium reduced forms - which only (and uniquely) depend on the fundamental structural shocks -, whereas indeterminate ones may actually be sunspot-free and possess fundamental (i.e. invertible) equilibrium representations. Hence, detecting a causal representation of the data cannot be interpreted as evidence of determinacy.

Suggested Citation

  • Marco M. Sorge, 2013. "On the Fundamentalness of Nonfundamentalness in DSGE Models," CSEF Working Papers 340, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:340
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    More about this item

    Keywords

    Indeterminacy; Noncausal VAR; Nonfundamentalness;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E0 - Macroeconomics and Monetary Economics - - General
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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