Identification of Singular and Noisy Structural VAR Models: The Collapsing-ICA Approach
42 Pages Posted: 9 Jul 2019 Last revised: 15 Mar 2020
Date Written: January 10, 2020
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: Suggested Citation