Minimality of State Space Solutions of DSGE Models and Existence Conditions for Their VAR Representation

Massimo Franchi and Paolo Paruolo

Computational Economics, 2015, vol. 46, issue 4, 613-626

Abstract: Standard solution methods of DSGE models do not necessarily deliver minimal state space forms. When the ABCD form is non-minimal, the conditions in the literature are not necessary for the existence of a VAR representation of the observables. In this paper we present necessary and sufficient conditions that are valid in general, and hence can be applied to minimal and non-minimal ABCD forms. If the state space form is minimal, our conditions coincide with those in the literature. These results also clarify that it is possible to have unstable eigenvalues together with a (possibly finite) VAR representation of the observables. Copyright European Union 2015

Keywords: DGSE models; VAR models; Fundamentalness; Finite order VAR; Minimal state space representation; C18; C32; E32 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (19)

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DOI: 10.1007/s10614-014-9465-4

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