Un-truncating VARs

Macroeconomic research often relies on structural vector autoregressions to uncover empirical regularities. Critics argue the method goes awry due to lag truncation: short lag-lengths imply a poor approximation to DSGE-models. Empirically, short lag-length is deemed necessary as increased parametrization induces excessive uncertainty. The paper shows that this argument is incomplete. Longer lag-length simultaneously reduces misspeci.cation, which in turn reduces variance. For data generated by frontier DSGE-models long-lag VARs are feasible, reduce bias and variance, and have better coverage. Thus, contrary to conventional wisdom, the trivial solution to the critique actually works.