A, B, C's (and D)'s for Understanding VARs
Abstract
The dynamics of a linear (or linearized) dynamic stochastic economic model can be
expressed in terms of matrices (A,B,C,D) that define a state space system. An associated
state space system (A,K,C,Sigma) determines a vector autoregression for observables
available to an econometrician. We review circumstances under which the impulse response
of the VAR resembles the impulse response associated with the economic model. We give
four examples that illustrate a simple condition for checking whether the mapping
from VAR shocks to economic shocks is invertible. The condition applies when there
are equal numbers of VAR and economic shocks.
Type
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https://hdl.handle.net/10161/1849Collections
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