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On weak identification in structural VARMA models
journal contribution
posted on 2023-05-19, 13:17 authored by Yao, W, Kam, T, Vahid, FWe simulate synthetic data from known data generating processes (DGPs) that arise from economic theory, and compare the performance of fitted VAR and VARMA models in estimating the true impulse responses to structural shocks. We show that while the VARMA structures implied by these DGPs are theoretically identified and lead to precise estimates of impulse responses given enough data, their parameters are close to the non-identified ridge in the parameter space, and that makes precise estimation of the impulse responses in small samples typical of macroeconomic data improbable. As a result, VARMA models barely show any advantage over VARs in characterizing the known DGPs in small samples. This is a refinement of the conjecture that near non-stationarity, near non-invertibility or weak identification could be possible reasons for the failure of structural VARMA models in providing good estimates of theoretical impulse responses of particular DSGE models.
History
Publication title
Economics LettersVolume
156Pagination
1-6ISSN
0165-1765Department/School
TSBEPublisher
ElsevierPlace of publication
Po Box 564, Lausanne, Switzerland, 1001Rights statement
Copyright 2017 Elsevier B.V.Repository Status
- Restricted