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Barcelona GSE Working Paper No. 536

Title: Testing for Sufficient Information in Structural VARs
Authors: Mario Forni and Luca Gambetti
Date: 22-02-2011
Keywords: Structural VAR, non-fundamentalness, information, FAVAR models, technology shocks
JEL Codes: C32, E32, E62
Abstract:
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.
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