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.
Structural VARs and noninvertible macroeconomic models
Gambetti L.
;
2019-01-01
Abstract
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.
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