Working Paper No. 546 | October 2008

Do the Innovations in a Monetary VAR Have Finite Variances?

Since Christopher Sims’s “Macroeconomics and Reality” (1980), macroeconomists have used structural VARs, or vector autoregressions, for policy analysis. Constructing the impulse-response functions and variance decompositions that are central to this literature requires factoring the variance-covariance matrix of innovations from the VAR. This paper presents evidence consistent with the hypothesis that at least some elements of this matrix are infinite for one monetary VAR, as the innovations have stable, non-Gaussian distributions, with characteristic exponents ranging from 1.5504 to 1.7734 according to ML estimates. Hence, Cholesky and other factorizations that would normally be used to identify structural residuals from the VAR are impossible.

Publication Highlight

Public Policy Brief No. 154
Another Bretton Woods Reform Moment
Let Us Look Seriously at the Clearing Union
Author(s): Jan Kregel
February 2021

Quick Search

Search in: