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On weak identification in structural VARMA models

Version 2 2024-06-06, 12:04
Version 1 2017-04-12, 10:49
journal contribution
posted on 2024-06-06, 12:04 authored by W Yao, T Kam, F Vahid
We 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

Journal

Economics letters

Volume

156

Pagination

1-6

Location

Amsterdam, The Netherlands

ISSN

0165-1765

Language

eng

Publication classification

C1 Refereed article in a scholarly journal

Copyright notice

2017, Elsevier

Publisher

Elsevier