A, B, C's (and D'S) for Understanding Vars

49 Pages Posted: 4 May 2005

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Date Written: May 2, 2005

Abstract

The dynamics of a linear (or linearized) dynamic stochastic economic model can be expressed in terms of matrices (A,B,C,D) that define a state space system. An associated state space system (A,K,C, Sigma) determines a vector autoregression for observables available to an econometrician. We review circumstances under which the impulse response of the VAR resembles the impulse response associated with the economic model. We give four examples that illustrate a simple condition for checking whether the mapping from VAR shocks to economic shocks is invertible. The condition applies when there are equal numbers of VAR and economic shocks.

Keywords: VARs , Invertibility, Estimation of Dynamic Equilibrium Models, economic shocks, innovations

JEL Classification: E0, C11, C3

Suggested Citation

Fernández-Villaverde, Jesús and Rubio-Ramirez, Juan Francisco and Sargent, Thomas J., A, B, C's (and D'S) for Understanding Vars (May 2, 2005). Available at SSRN: https://ssrn.com/abstract=717963 or http://dx.doi.org/10.2139/ssrn.717963

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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Juan Francisco Rubio-Ramirez

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Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business ( email )

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