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
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; Granger causality; non-fundamentalness; small scale VARs (search for similar items in EconPapers)
JEL-codes: C32 C5 E5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-ecm and nep-mac
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Working Paper: Are Small-Scale SVARs Useful for Business Cycle Analysis? Revisiting Non-Fundamentalness (2016)
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