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Using the global dimension to identify shocks with sign restrictions

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  • Chudik, Alexander
  • Fidora, Michael

Abstract

Identification of structural VARs using sign restrictions has become increasingly popular in the academic literature. This paper (i) argues that identification of shocks can benefit from introducing a global dimension, and (ii) shows that summarising information by the median of the available impulse responses—as commonly done in the literature—has some undesired features that can be avoided by using an alternatively proposed summary measure based on a “scaled median” estimate of the structural impulse response. The paper implements this approach in both a small scale model as originally presented in Uhlig (2005) and a large scale model, introducing the sign restrictions approach to the global VAR (GVAR) literature, that allows to explore the global dimension by adding a large number of sign restrictions. We find that the patterns of impulse responses are qualitatively similar though point estimates tend to be quantitatively much larger in the alternatively proposed approach. In addition, our GVAR application in the context of global oil supply shocks documents that oil supply shocks have a stronger impact on emerging economies’ real output as compared to mature economies, a negative impact on real growth in oil-exporting economies as well, and tend to cause an appreciation (depreciation) of oil-exporters’ (oil-importers’) real exchange rates but also lead to an appreciation of the US dollar. One possible explanation would be the recycling of oil-exporters’ increased revenues in US financial markets. JEL Classification: C32, E17, F37, F41, F47

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1318.

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Date of creation: Apr 2011
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Handle: RePEc:ecb:ecbwps:20111318

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Keywords: Global VAR; Identification of Shocks; oil shocks; sign restrictions; VAR;

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References

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  1. Andrew Mountford & Harald Uhlig, 2008. "What are the Effects of Fiscal Policy Shocks?," NBER Working Papers 14551, National Bureau of Economic Research, Inc.
  2. Alexander Chudik & M. Hashem Pesaran & Elisa Tosetti, 2011. "Weak and strong cross‐section dependence and estimation of large panels," Econometrics Journal, Royal Economic Society, vol. 14(1), pages C45-C90, February.
  3. Jon Faust, 1998. "The robustness of identified VAR conclusions about money," International Finance Discussion Papers 610, Board of Governors of the Federal Reserve System (U.S.).
  4. Renee Fry & Adrian Pagan, 2007. "Some Issues in Using Sign Restrictions for Identifying Structural VARs," NCER Working Paper Series 14, National Centre for Econometric Research.
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Cited by:
  1. Cesa-Bianchi, Ambrogio, 2013. "Housing cycles and macroeconomic fluctuations: A global perspective," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 215-238.
  2. Galesi, Alessandro & Lombardi, Marco J., 2009. "External shocks and international inflation linkages: a global VAR analysis," Working Paper Series 1062, European Central Bank.
  3. Alexander Chudik & Michael Fidora, 2012. "How the global perspective can help us identify structural shocks," Staff Papers, Federal Reserve Bank of Dallas, issue Dec.
  4. Beatrice D. Simo-Kengne & Rangan Gupta & Goodness C. Aye, 2013. "Macro Shocks And House Prices In South Africa," Working Papers 201302, University of Pretoria, Department of Economics.

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