Quantifying Dynamic Misspecification Biases in VARs

• Authors: Oriol González-Casasús
• BSE Working Paper: 1595 | September 2026
• Keywords: vector autoregression, dynamic mis-specification, robust inference, price puzzle
• JEL codes: C12, C32, C52, E52

Applied macroeconomists favor parsimonious VARs, which selection criteria and specification pre-tests routinely endorse. I show that weak, long-lived omitted dynamics escape those diagnostics and cannot be consistently estimated, yet the bias they induce in impulse responses and forecasts admits valid confidence intervals. Researchers can then keep the parsimonious VAR and state the direction and magnitude of the distortion it carries. In US data, the bias in the price response to a monetary contraction is significantly positive at several horizons, accounting for part of the price puzzle without expanding the cross-sectional information set.