When is Nonfundamentalness in SVARs A Real Problem?

Identification of structural shocks can be subject to non fundamentalness, as the econometrician may have an information set smaller than the economic agents’ one. How serious is that problem from a quantitative point of view? In this work we propose a simple diagnosis statistics for the quantitative importance of non fundamentalness in structural VARs. The diagnosis is of interest as non fundamentalness is not an either/or question, but is a quantitative issue which can be more or less severe. Using our preferred strategy for identifying news shocks, we find that non fundamentalness is quantitatively unimportant and that news shocks continue to generate significant business cycle type fluctuations when adjust the estimating procedure to take into account the potential non fundamentalness issue