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Economic and VAR Shocks: What Can Go Wrong?

Author

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  • Jesús Fernández-Villaverde
  • Juan F. Rubio-Ramíre
  • Thomas J. Sargent

Abstract

This paper discusses the problem of invertibility between the economic shocks in a dynamic equilibrium model and the corresponding VAR innovations. We present an algebraic check of invertibility based on the model fundamentals and we find the identification scheme that recovers the economic shocks from the VAR innovations when the model is invertible. We illustrate our results with a model of the Great Depression proposed by Christiano, Motto, and Rostagno (2003). (JEL: E00, E32, C32) (c) 2006 by the European Economic Association.
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Suggested Citation

  • Jesús Fernández-Villaverde & Juan F. Rubio-Ramíre & Thomas J. Sargent, 2006. "Economic and VAR Shocks: What Can Go Wrong?," Levine's Bibliography 122247000000000990, UCLA Department of Economics.
    • Handle: RePEc:cla:levrem:122247000000000990
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    File URL: http://www.econ.upenn.edu/~jesusfv/format_jeea3.pdf
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    References listed on IDEAS

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    1. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez & Thomas J. Sargent & Mark W. Watson, 2007. "ABCs (and Ds) of Understanding VARs," American Economic Review, American Economic Association, vol. 97(3), pages 1021-1026, June.
    2. Christiano, Lawrence J, 1990. "Linear-Quadratic Approximation and Value-Function Iteration: A Comparison," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 99-113, January.
    3. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2003. "The Great Depression and the Friedman-Schwartz hypothesis," Proceedings, Federal Reserve Bank of Cleveland, pages 1119-1215.
    4. Lars Peter Hansen & Thomas J. Sargent, 1993. "Recursive linear models of dynamic economies," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    5. Marimon, Ramon & Scott, Andrew (ed.), 1999. "Computational Methods for the Study of Dynamic Economies," OUP Catalogue, Oxford University Press, number 9780198294979.
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    Cited by:

    1. Helmut Lütkepohl, 2012. "Fundamental Problems with Nonfundamental Shocks," Discussion Papers of DIW Berlin 1230, DIW Berlin, German Institute for Economic Research.
    2. Linnemann, Ludger, 2009. "Macroeconomic effects of shocks to public employment," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 252-267, June.

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    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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