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Reducing Confidence Bands for Simulated Impulse Responses

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  • Helmut Lütkepohl

Abstract

It is emphasized that the shocks in structural vector autoregressions are only identified up to sign and it is pointed out that this feature can result in very misleading confidence intervals for impulse responses if simulation methods such as Bayesian or bootstrap methods are used. The confidence intervals heavily depend on which variable is used for fixing the sign of the initial responses. In particular, when the shocks are identified via long-run restrictions the problem can be severe. It is pointed out that a suitable choice of variable for fixing the sign of the initial responses can result in substantial reductions in the confidence bands for impulse responses.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.407105.de/dp1235.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1235.

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Length: 16 p.
Date of creation: 2012
Date of revision:
Handle: RePEc:diw:diwwpp:dp1235

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Keywords: Vector autoregressive process; impulse responses; bootstrap; Bayesian estimation;

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  1. Markku Lanne, Helmut Luetkepohl, 2006. "Identifying Monetary Policy Shocks via Changes in Volatility," Economics Working Papers, European University Institute ECO2006/23, European University Institute.
  2. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5994, C.E.P.R. Discussion Papers.
  3. Markku Lanne & Helmut Luetkepohl & Katarzyna Maciejowska, 2009. "Structural Vector Autoregressions with Markov Switching," Economics Working Papers, European University Institute ECO2009/06, European University Institute.
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Cited by:
  1. Aleksei NETSUNAJEV, 2012. "Reaction to Technology Shocks in Markov-Switchings Structural VARs: Identification via heteroskedasticity," Economics Working Papers, European University Institute ECO2012/13, European University Institute.

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