Speaker: Fabio Canova, EUI
Abstract: Non-fundamentalness arises when observables do not contain enough information to
recover the vector of structural shocks. Using Granger causality tests, the literature
suggested that many small scale VAR models are non-fundamental and thus not useful
for business cycle analysis. We show that causality tests are problematic when VAR
variables are cross sectionally aggregated or proxy for non-observables. We provide an
alternative testing procedure, illustrate its properties with a Monte Carlo exercise, and
reexamine the properties of two prototypical VAR models.