Vector autoregressions and reduced form representations of DSGE models

No 619, Working Papers from Banco de España

Abstract: Dynamic Stochastic General Equilibrium models are often tested against empirical VARs or estimated by minimizing the distance between the model's and the VAR impulse response functions. These methodologies require that the data-generating process consistent with the DSGE theoretical model has a VAR representation. This paper discusses the assumptions needed for a finite-order VAR(p) representation of any subset of a DSGE model variables to exist. When a VAR(p) is only an approximation to the true VAR, the paper shows that the truncated VAR(p) may return largely incorrect estimates of the impulse response function. The results do not hinge on an incorrect identification strategy or on small sample bias. But the bias introduced by truncation can lead to bias in the identification of the structural shocks. Identification strategies that are equivalent in the true VAR representation perform differently in the approximating VAR.

Keywords: vector autoregression; dynamic stochastic general equilibrium model; business cycle shocks (search for similar items in EconPapers)
JEL-codes: C13 C22 E32 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2006-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ets and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/06/Fic/dt0619e.pdf First version, September 2006 (application/pdf)

Related works:
Journal Article: Vector autoregressions and reduced form representations of DSGE models (2007)
Working Paper: Vector Autoregressions and Reduced Form Representations of DSGE Models (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0619

Access Statistics for this paper

More papers in Working Papers from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España ().