2007/22 | LEM Working Paper Series | |
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A Review of Nonfundamentalness and Identification in Structural VAR Models |
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Lucia Alessi, Matteo Barigozzi, Marco Capasso |
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Keywords | ||
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Nonfundamentalness, Structural VAR, Dynamic Stochastic General Equilibrium Models, Factor Models
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JEL Classifications | ||
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C32, C51, C52
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Abstract | ||
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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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