Fundamental Problems with Nonfundamental Shocks

21 Pages Posted: 1 Aug 2012

See all articles by Helmut Luetkepohl

Helmut Luetkepohl

German Institute for Economic Research (DIW Berlin)

Date Written: July 1, 2012

Abstract

Economic agents using information that is not incorporated in the econometric model is seen as a possible reason for why nonfundamental shocks are important in econometric models. Allowing for nonfundamental shocks in structural vector autoregressive (SVAR) analysis by considering moving average (MA) representations with roots in the complex unit circle is a possible response to the problem. A case is made for viewing nonfundamentalness as an omitted variables problem rather than a problem of MA roots in the unit circle. The omitted variables problem will always lurk in the background of SVAR analysis as well as other econometric studies and cannot be avoided. In SVAR analysis it is even more problematic than what the literature on nonfundamental shocks suggests. Still, SVARs can be useful tools for empirical analysis.

Keywords: structural vector autoregression, moving average representation, vector autoregressive moving average process, impulse response analysis, factor augmented VAR, Bayesian VAR J

JEL Classification: C32

Suggested Citation

Luetkepohl, Helmut, Fundamental Problems with Nonfundamental Shocks (July 1, 2012). DIW Berlin Discussion Paper No. 1230, Available at SSRN: https://ssrn.com/abstract=2121245 or http://dx.doi.org/10.2139/ssrn.2121245

Helmut Luetkepohl (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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