Business Cycle Analysis And VARMA Models

Can long-run identified Structural Vector AutoRegressions (SVARs) discriminate between competing models in practice? Several authors have suggested SVARs fail partly because they are finite-order approximations to infinite-order processes. The authors estimate Vector AutoRegressive Moving Average (VARMA) and state space models, which are not misspecified, using simulated data and compare true with estimated impulse responses of hours worked to a technology shock. They find few gains from using VARMA models. However, state space algorithms can outperform SVARs.