Scandinavian Working Papers in Economics

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

No 451: Long-Lag VARs

Ferre De Graeve () and Andreas Westermark ()
Additional contact information
Ferre De Graeve: KU Leuven
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,(S)VARs, to uncover empirical regularities. Critics argue the method goes awry due to lag truncation: short lag lengths imply a poor approximation to impor tant data-generating processes (e.g. 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 simulta neously reduces misspecification, which in turn reduces variance. Contrary to conventional wisdom, the trivial solution to the critique actually works. For data generated by frontier DSGE models long-lag VARs are feasible, reduce bias and variance, and have better mean-squared error. Long-lag VARs are also viable in common macroeconomic data and signiÖcantly change structural conclusions about the impact of technology and monetary policy shocks on the economy.

Keywords: VAR; SVAR; Lag-length; Lag truncation

JEL-codes: C18; E37

Language: English

46 pages, First version: May 1, 2025. Revised: September 1, 2025. Earlier revisions: September 1, 2025.

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