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A Back-of-the-Envelope Rule to Identify Atheoretical VARs

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  • Urzúa, Carlos M.

    ()
    (Tecnológico de Monterrey, Campus Ciudad de México)

Abstract

Vector autoregressive models are often used in Macroeconomics to draw conclusions about the effects of policy innovations. However, those results depend on the researcher’s priors about the particular ordering of the variables. As an alternative, this paper presents a simple rule based on the Maximum Entropy principle that can be used to find the “most likely” ordering. The proposal is illustrated in the case of a VAR model of the U.S. economy. It is found that monetary policy shocks are better represented by innovations in the federal funds rate rather than by innovations in non-borrowed reserves.

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File URL: http://alejandria.ccm.itesm.mx/egap/documentos/EGAP-2007-03.pdf
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Paper provided by Tecnológico de Monterrey, Campus Ciudad de México in its series EGAP Working Papers with number 2007-03.

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Date of creation: Feb 2007
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Handle: RePEc:ega:docume:200703

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Web page: http://www.ccm.itesm.mx/egap/
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Keywords: VAR; impulse-response functions; varimin; maximum entropy; monetary policy shocks;

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  1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  2. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  3. James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
  4. Lippi, Marco & Reichlin, Lucrezia, 1993. "Diffusion of Technical Change and the Decomposition of Output into Trend and Cycle," CEPR Discussion Papers 775, C.E.P.R. Discussion Papers.
  5. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
  6. Uhlig, Harald, 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," CEPR Discussion Papers 2137, C.E.P.R. Discussion Papers.
  7. Henry Kaiser, 1958. "The varimax criterion for analytic rotation in factor analysis," Psychometrika, Springer, vol. 23(3), pages 187-200, September.
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
  9. McCallum, Bennett T., 1983. "A reconsideration of Sims' evidence concerning monetarism," Economics Letters, Elsevier, vol. 13(2-3), pages 167-171.
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