On weak identification in structural VARMA models

We simulate synthetic data from known data generating processes (DGPs) that arise from economic theory, and compare the performance of fitted VAR and VARMA models in estimating the true impulse responses to structural shocks. We show that while the VARMA structures implied by these DGPs are theoretically identified and lead to precise estimates of impulse responses given enough data, their parameters are close to the non-identified ridge in the parameter space, and that makes precise estimation of the impulse responses in small samples typical of macroeconomic data improbable. As a result, VARMA models barely show any advantage over VARs in characterizing the known DGPs in small samples. This is a refinement of the conjecture that near non-stationarity, near non-invertibility or weak identification could be possible reasons for the failure of structural VARMA models in providing good estimates of theoretical impulse responses of particular DSGE models. •Identification of impulse response functions in DSGE models is investigated.•Simulations show impulse responses are identified only in large samples.•The true VARMA order cannot be identified due to the closeness of AR and MA roots.•Weak identification of VARMA form is endemic to a wide variety of DSGE models.