Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 271: Un-truncating VARs

Ferre De Graeve () and Andreas Westermark ()
Additional contact information
Ferre De Graeve: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Andreas Westermark: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: Macroeconomic research often relies on structural vector autoregressions to uncover empirical regularities. Critics argue the method goes awry due to lag truncation: short lag-lengths imply a poor approximation to DSGE-models. Empirically, short lag-length is deemed necessary as increased parametrization induces excessive uncertainty. The paper shows that this argument is incomplete. Longer lag-length simultaneously reduces misspecification, which in turn reduces variance. For data generated by frontier DSGE-models long-lag VARs are feasible, reduce bias and variance, and have better coverage. Thus, contrary to conventional wisdom, the trivial solution to the critique actually works.

Keywords: VAR; SVAR; Lag-length; Truncation

JEL-codes: C18; E37

28 pages, June 1, 2013

Full text files 

rap_wp271_130626.pdf PDF-file

Download statistics

Questions (including download problems) about the papers in this series should be directed to Lena Löfgren ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2024-02-05 17:13:28.