On the Fundamentalness of Nonfundamentalness in DSGE Models

Marco Sorge

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: This note warns against the use of noncausal VARs as a reliable test for indeterminacy. By means of a simple example, we show that determinate models may well entail nonfundamental ARMA equilibrium reduced forms - which only (and uniquely) depend on the fundamental structural shocks -, whereas indeterminate ones may actually be sunspot-free and possess fundamental (i.e. invertible) equilibrium representations. Hence, detecting a causal representation of the data cannot be interpreted as evidence of determinacy.

Keywords: Indeterminacy; Noncausal VAR; Nonfundamentalness (search for similar items in EconPapers)
JEL-codes: C62 D84 E0 (search for similar items in EconPapers)
Date: 2013-09-19
New Economics Papers: this item is included in nep-dge
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