Nonfundamentalness or missing information ? Evidence from causal-noncausal VARs in macro-finance

2026-07-30

AI Summary

This study investigates whether the noncausal dynamics observed in macroeconomic VAR models stem from genuine non-fundamentalness or from omitted common information that is available to economic agents but unobserved by econometricians. To address this, the paper proposes a hybrid causal–noncausal VARX framework integrated with factor filtering and employs the generalized covariance (GCov) estimator to effectively identify and correct noncausal components. Empirical application to the Stock–Watson monetary policy SVAR demonstrates that the proposed approach substantially attenuates spurious noncausal signals, yielding impulse responses that align more closely with theoretical priors and notably alleviating the “price puzzle.” This refinement enables a more accurate recovery of the underlying causal structure of the economy.

Abstract

This paper studies the presence of noncausal dynamics in standard macro-finance VAR models and asks whether they reflect genuine nonfundamentalness or omitted information available to economic agents but unobserved by the econometrician. To that end, we introduce a factor-filtering mixed causal-noncausal VARX approach designed to account for common macroeconomic information. We assess its performance in simulated settings, while showing also that the generalized covariance (GCov) estimator correctly recovers causal and noncausal dynamics when using several lags. Empirically, we revisit the well-known Stock-Watson monetary policy (S)VAR and show that the noncausal components detected in the baseline specification largely disappear once common factors are filtered out. Finally, we compare impulse responses from the filtered and original data to assess the transmission of monetary policy shocks and show that filtering further removes the price puzzle.

Problem

• nonfundamentalness
• missing information
• causal-noncausal VAR
• macro-finance
• omitted variables

Innovation

• mixed causal-noncausal VARX
• factor filtering
• nonfundamentalness
• generalized covariance (GCov)
• price puzzle