American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
ABCs (and Ds) of Understanding VARs
American Economic Review
vol. 97,
no. 3, June 2007
(pp. 1021–1026)
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 for a vector of observables. An associated state space system (A,ˆB,C,ˆD) determines a vector autoregression for those same observables. We present a simple condition for checking when these two state space systems match up and when they do not when there are equal numbers of economic and VAR shocks. We illustrate our condition with a permanent income example. (JEL C32, E32)Citation
Fernández-Villaverde, Jesús, Juan F. Rubio-Ramírez, Thomas J. Sargent, and Mark W. Watson. 2007. "ABCs (and Ds) of Understanding VARs." American Economic Review, 97 (3): 1021–1026. DOI: 10.1257/aer.97.3.1021JEL Classification
- C32 Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E32 Business Fluctuations; Cycles