The problem of non-fundamental representations

Abstract

The validity of dynamic simulation results obtained from Structural VAR model has been very strongly criticised in two recent papers (Lippi and Reichlin, 1993 and 1994). The content of this criticism is closely connected to the existence and the relevance of non fundamental MA representations (see Hansen e Sargent, 1991, ch. 4). We start this chapter by describing the content of the Lippi and Reichlin criticism. Section 8.1 is devoted to explain the notion of non fundamental representation in time series models. Section 8.2 presents some examples of economic models generating non fundamental representations and section 8.3 connects the issue of the existence of non fundamental representations to Structural VAR analysis, presenting a new way to assess the relevance of these representations in particular applications. An applied example of this procedure is contained in section 8.4.