DP8209 Testing for Sufficient Information in Structural VARs

Author(s): Mario Forni, Luca Gambetti
Publication Date: January 2011
Keyword(s): FAVAR models, information, non-fundamentalness, Structural VAR, technology shocks.
JEL(s): C32, E32, E62
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8209

We derive necessary and sufficient conditions under which a set of variables is informationally sufficient, i.e. it contains enough information to estimate the structural shocks with a VAR model. Based on such conditions, we suggest a procedure to test for informational sufficiency. Moreover, we show how to amend the VAR if informational sufficiency is rejected. We apply our procedure to a VAR including TFP, unemployment and per-capita hours worked. We find that the three variables are not informationally sufficient. When adding missing information, the effects of technology shocks change dramatically.