Structural VARs and Noninvertible Macroeconomic Models

• Authors: Luca Gambetti.
• Journal of Applied Econometrics
• Econometrics and Quantitative Methods

We resume the line of research pioneered by C. A. Sims and Zha (Macroeconomic Dynamics, 2006, 10, 231–272) and make two novel contributions. First, we provide a formal treatment of partial fundamentalness—that is, the idea that a structural vector autoregression (VAR) can recover, either exactly or with good approximation, a single shock or a subset of shocks, even when the underlying model is nonfundamental. In particular, we extend the measure of partial fundamentalness proposed by Sims and Zha to the finite-order case and study the implications of partial fundamentalness for impulse-response and variance-decomposition analysis. Second, we present an application where we validate a theory of news shocks and find it to be in line with the empirical evidence.