Vector Autoregressions and Reality

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The statistical significance of variance decompositions and impulse response functions for unrestricted vector autoregressions is questionable. Most previous studies are suspect because they have not provided confidence intervals for variance decompositions and impulse response functions. Here two methods of computing such intervals are developed, one using a normal approximation, the other using bootstrapped resampling. An example from Sims’ work illustrates the importance of computing these confidence intervals. In the example, the 95 percent confidence intervals for variance decompositions span up to 66 percentage points at that usual forecasting horizon.

Published in: Journal of Business and Economic Statistics (Vol. 20, No. 1, January 2002, pp. 128-133) https://doi.org/10.1198/073500102753410435.

Published in: Journal of Business and Economic Statistics (Vol. 5, No. 4, October 1987, pp. 437-442) https://doi.org/10.2307/1391992.