ABCs (and Ds) of Understanding VARs

摘要

How informative are unrestricted VARs about how particular economic models respond to preference, technology, and information shocks? In the simplest possible setting, this paper provides a check for whether a theoretical model has the property in population that it is possible to infer economic shocks and impulse responses to them from the innovations and the impulse responses associated with a vector au-toregression (VAR). We revisit an invertibility issue that is known to cause a potential problem for interpreting VARs, and present a simple check for its presence. We illustrate our check in the context of a permanent income model for which it can be applied by hand.