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Narrative Restrictions and Proxies

Author

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  • Raffaella Giacomini
  • Toru Kitagawa
  • Matthew Read

Abstract

We compare two approaches to using information about the signs of structural shocks at specific dates within a structural vector autoregression (SVAR): imposing “narrative restrictions” (NR) on the shock signs in an otherwise set-identified SVAR; and casting the information about the shock signs as a discrete-valued “narrative proxy” (NP) to point-identify the impulse responses. The NP is likely to be “weak” given that the sign of the shock is typically known in a small number of periods, in which case the weak-proxy robust confidence intervals in Montiel Olea, Stock, and Watson are the natural approach to conducting inference. However, we show both theoretically and via Monte Carlo simulations that these confidence intervals have distorted coverage—which may be higher or lower than the nominal level—unless the sign of the shock is known in a large number of periods. Regarding the NR approach, we show that the prior-robust Bayesian credible intervals from Giacomini, Kitagawa, and Read deliver coverage exceeding the nominal level, but which converges toward the nominal level as the number of NR increases.

Suggested Citation

  • Raffaella Giacomini & Toru Kitagawa & Matthew Read, 2022. "Narrative Restrictions and Proxies," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 40(4), pages 1415-1425, October.
  • Handle: RePEc:taf:jnlbes:v:40:y:2022:i:4:p:1415-1425
    DOI: 10.1080/07350015.2022.2115496
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    Cited by:

    1. Sarah Arndt & Zeno Enders, 2023. "The Transmission of Supply Shocks in Different Inflation Regimes," CESifo Working Paper Series 10839, CESifo.
    2. Yujia, Li & Zixiang, Zhu & Ming, Che, 2024. "Exploring the relationship between China's economic policy uncertainty and business cycles: Exogenous impulse or endogenous responses?," Emerging Markets Review, Elsevier, vol. 58(C).
    3. Arndt, Sarah & Enders, Zeno, 2023. "Shock Transmissions in Different Inflation Regimes," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277682, Verein für Socialpolitik / German Economic Association.

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