Are Small-Scale SVARs Useful for Business Cycle Analysis? Revisiting Nonfundamentalness Articles uri icon

authors

  • CANOVA, FABIO
  • HAMIDISAHNEH, MEHDI

publication date

  • August 2018

start page

  • 1069

end page

  • 1093

issue

  • 4

volume

  • 16

International Standard Serial Number (ISSN)

  • 1542-4766

Electronic International Standard Serial Number (EISSN)

  • 1542-4774

abstract

  • Nonfundamentalness arises when current and past values of the observables do not contain enough information to recover structural vector autoregressive (SVAR) disturbances. Using Granger causality tests, the literature suggested that several small-scale SVAR models are nonfundamental and thus not necessarily useful for business cycle analysis. We show that causality tests are problematic when SVAR variables cross-sectionally aggregate the variables of the underlying economy or proxy for nonobservables. We provide an alternative testing procedure, illustrate its properties with Monte Carlo simulations, and re-examine a prototypical small-scale SVAR model. (JEL: C5, C32, E5)

subjects

  • Economics

keywords

  • time-series models; dynamic quantile regressions; dynamic treatment effect models; diffusion processes; state space models; econometric modeling; monetary policy; central banking, and the supply of money and credit