A critique of structural VARs using real business cycle theory

Varadarajan Chari, Patrick Kehoe and Ellen McGrattan

No 631, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: The main substantive finding of the recent structural vector autoregression literature with a differenced specification of hours (DSVAR) is that technology shocks lead to a fall in hours. Researchers have used these results to argue that business cycle models in which technology shocks lead to a rise in hours should be discarded. We evaluate the DSVAR approach by asking, is the specification derived from this approach misspecified when the data are generated by the very model the literature is trying to discard? We find that it is misspecified. Moreover, this misspecification is so great that it leads to mistaken inferences that are quantitatively large. We show that the other popular specification that uses the level of hours (LSVAR) is also misspecified. We argue that alternative state space approaches, including the business cycle accounting approach, are more fruitful techniques for guiding the development of business cycle theory.> > Replaced by Staff Report No. 364

Keywords: Vector autoregression; Business cycles (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (78)

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Working Paper: A Critique of Structural VARs Using Real Business Cycle Theory (2004)
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