Identification of Singular and Noisy Structural VAR Models: The Collapsing-ICA Approach

42 Pages Posted: 9 Jul 2019 Last revised: 15 Mar 2020

See all articles by Francesco Cordoni

Francesco Cordoni

Scuola Normale Superiore

Fulvio Corsi

University of Pisa - Department of Economics; City University London

Date Written: January 10, 2020

Abstract

When the number of variables is larger than the number of structural shocks driving the economy, the associated structural VAR system is said to be singular. We propose an identification method for singular structural VAR models contaminated by noise that combines a collapsing procedure with the Independent Component Analysis. We discuss the fundamentalness property of the associated structural shocks, the consistency of the proposed combined procedure and examine its finite sample properties with Monte Carlo simulations. The empirical application of the proposed scheme on U.S. data allows to identify the low dimensional system of structural shocks driving the U.S. economy.

Keywords: Structural vector autoregressive model, Identification, Independent component analysis, Pseudo maximum likelihood, Overdetermined ICA, Noisy ICA, Impulse response functions

JEL Classification: C14, C32, C51, E52

Suggested Citation

Cordoni, Francesco and Corsi, Fulvio, Identification of Singular and Noisy Structural VAR Models: The Collapsing-ICA Approach (January 10, 2020). Available at SSRN: https://ssrn.com/abstract=3415426 or http://dx.doi.org/10.2139/ssrn.3415426

Francesco Cordoni (Contact Author)

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, 56126
Italy

Fulvio Corsi

University of Pisa - Department of Economics ( email )

via Ridolfi 10
I-56100 Pisa, PI 56100
Italy

HOME PAGE: http://people.unipi.it/fulvio_corsi/

City University London ( email )

Northampton Square
London, EC1V OHB
United Kingdom

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