Dear Johannes,

Thank you very much for your previous reply, I am grateful.

I have a question about var representation of dsge model in the following paper:

In this DSGE model, the prior mean of standard errors of shocks is set to 0.01 instead of 1. I have modified this model by replacing measurement error with another structural shock, so the number of observables equals the number of shocks

I can find a finite VAR representation for the modified DSGE model,

Define X_t as observable vector, U_t as reduced form shock vector, V_t as structural innovation vector

\Lambda is lag operator matrix, i have:

\Lambda X_t=U_t=\delta V_t, in order to identify this finite VAR representation of DSGE model, I impose constraint on variance-covariance matrix of V_t, Covariance Matrix of V_t=0.01 I,

However, in the literature, people impose covariance matrix of V_t=I, but their associated DSGE shock variance’s prior mean is 1 instead of 0.01

I have add 0.01 because my DSGE shock variance’s prior mean is 0.01 ,

My question is my imposed constraint of structural shocks V_t covariance matrix as 0.01 I right or wrong?

Thank you very much and look forward to hearing from you.

Jesse