Are small scale VARs useful for business cycle analysis? Revisiting Non-Fundamentalness

Fabio Canova and Mehdi Hamidi Sahneh ()

No 11041, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Non-fundamentalness arises when observables do not contain enough information to recover the vector of structural shocks. Using Granger causality tests, the literature suggested that many small scale VAR models are non-fundamental and thus not useful for business cycle analysis. We show that causality tests are problematic when VAR variables are cross sectionally aggregated or proxy for non-observables. We provide an alternative testing procedure, illustrate its properties with a Monte Carlo exercise, and reexamine the properties of two prototypical VAR models.

Keywords: Aggregation; Non-fundamentalness; Granger causality; Small scale vars (search for similar items in EconPapers)
JEL-codes: C32 C5 E5 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-ban, nep-ecm and nep-mac
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Are Small-Scale SVARs Useful for Business Cycle Analysis? Revisiting Nonfundamentalness (2018)
Working Paper: Are Small-Scale SVARs Useful for Business Cycle Analysis? Revisiting Non-Fundamentalness (2016)
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