Testing for Sufficient Information in Structural VARs

• Authors: Luca Gambetti.
• BSE Working Paper: 110027 | September 15
• Keywords: information , technology shocks , non-fundamentalness , Structural VAR , FAVAR models
• JEL codes: C32, E32, E62
• information
• technology shocks
• non-fundamentalness
• Structural VAR
• FAVAR models

We derive necessary and sufficient conditions under which a set of variables is informationally sufficient, i.e. it contains enough information to estimate the structural shocks with a VAR model. Based on such conditions, we suggest a procedure to test for informational sufficiency. Moreover, we show how to amend the VAR if informational sufficiency is rejected. We apply our procedure to a VAR including TFP, unemployment and per-capita hours worked. We find that the three variables are not informationally sufficient. When adding missing information, the effects of technology shocks change dramatically.