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A procedure for combining zero and sign restrictions in a VAR-identification scheme

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  • Alex Haberis

    ()
    (Bank of England
    Centre for Macroeconomics (CFM))

  • Andrej Sokol

    ()
    (Bank of England)

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    Abstract

    In this paper we describe a procedure for implementing zero restrictions within the context of a sign restrictions identification scheme for VARs. The procedure introduces an additional step into the algorithm outlined in Fry and Pagan (2011) and Rubio-Ramirez et al. (2006) for implementing sign restrictions. This extra step involves rotating a candidate identification matrix using Givens rotation matrices to introduce zero restrictions. We then check whether the elements of the candidate matrix satisfy the sign restrictions as usual. We illustrate how our procedure works by generating artificial data from the theoretical model of An and Schorfheide (2007), which implies certain restrictions on the impact of its structural shocks on the model's endogenous variables. We exploit our knowledge of that pattern to identify structural shocks from the reduced-form errors of a VAR estimated on the simulated data.

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    Bibliographic Info

    Paper provided by Centre for Macroeconomics (CFM) in its series Discussion Papers with number 1410.

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    Length: 14 pages
    Date of creation: Jun 2014
    Date of revision:
    Handle: RePEc:cfm:wpaper:1410

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    1. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
    2. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
    3. Arias, Jonas E. & Rubio-Ramirez, Juan F. & Waggoner, Daniel F., 2014. "Inference Based on SVARs Identified with Sign and Zero Restrictions: Theory and Applications," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1100, Board of Governors of the Federal Reserve System (U.S.).
    4. Federico Ravenna, 2006. "Vector autoregressions and reduced form representations of DSGE models," Banco de Espa�a Working Papers 0619, Banco de Espa�a.
    5. Ivana Komunjer & Serena Ng, 2011. "Dynamic Identification of Dynamic Stochastic General Equilibrium Models," Econometrica, Econometric Society, Econometric Society, vol. 79(6), pages 1995-2032, November.
    6. Renee Fry & Adrian Pagan, 2010. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," CAMA Working Papers 2010-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Christiane Baumeister & Luca Benati, 2013. "Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 165-212, June.
    8. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez & Thomas J. Sargent & Mark W. Watson, 2007. "ABCs (and Ds) of Understanding VARs," American Economic Review, American Economic Association, American Economic Association, vol. 97(3), pages 1021-1026, June.
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