Standard solution methods of DSGE models do not necessarily deliver minimal state space forms. When the ABCD form is non-minimal, the conditions in the literature are not necessary for the existence of a VAR representation of the observables. In this paper we present necessary and sufficient conditions that are valid in general, and hence can be applied to minimal and non-minimal ABCD forms. If the state space form is minimal, our conditions coincide with those in the literature. These results also clarify that it is possible to have unstable eigenvalues together with a (possibly finite) VAR representation of the observables.
Minimality of State Space Solutions of DSGE Models and Existence Conditions for Their VAR Representation / Franchi, Massimo; P., Paruolo. - In: COMPUTATIONAL ECONOMICS. - ISSN 0927-7099. - (2015), pp. 613-626. [10.1007/s10614-014-9465-4]
Minimality of State Space Solutions of DSGE Models and Existence Conditions for Their VAR Representation
FRANCHI, Massimo;
2015
Abstract
Standard solution methods of DSGE models do not necessarily deliver minimal state space forms. When the ABCD form is non-minimal, the conditions in the literature are not necessary for the existence of a VAR representation of the observables. In this paper we present necessary and sufficient conditions that are valid in general, and hence can be applied to minimal and non-minimal ABCD forms. If the state space form is minimal, our conditions coincide with those in the literature. These results also clarify that it is possible to have unstable eigenvalues together with a (possibly finite) VAR representation of the observables.File | Dimensione | Formato | |
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