Infinite-variance, Alpha-stable Shocks in Monetary SVAR: Final Working Paper Version
AbstractThis paper adumbrates a theory of what might be going wrong in the monetary SVAR literature and provides supporting empirical evidence. The theory is that macroeconomists may be attempting to identify structural forms that do not exist, given the true distribution of the innovations in the reduced-form VAR. The paper shows that this problem occurs whenever (1) some innovation in the VAR has an infinite-variance distribution and (2) the matrix of coefficients on the contemporaneous terms in the VAR's structural form is nonsingular. Since (2) is almost always required for SVAR analysis, it is germane to test hypothesis (1). Hence, in this paper, we fit a-stable distributions to VAR residuals and, using a parametric-bootstrap method, test the hypotheses that each of the error terms has finite variance.
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Bibliographic InfoPaper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_682.
Date of creation: Aug 2011
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Vector Autoregression; Levy-stable Distribution; Infinite Variance; Monetary Policy Shocks; Heavy-tailed Error Terms; Factorization; Impulse-Response Function;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-29 (All new papers)
- NEP-ETS-2011-08-29 (Econometric Time Series)
- NEP-MON-2011-08-29 (Monetary Economics)
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