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Generalized Impulse Response Analysis: General or Extreme?

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  • Hyeongwoo, Kim

Abstract

This note discusses a pitfall of using the generalized impulse response function (GIRF) in vector autoregressive (VAR) models (Pesaran and Shin, 1998). The GIRF is general because it is invariant to the ordering of the variables in the VAR. The GIRF, in fact, is extreme because it yields a set of response functions that are based on extreme identifying assumptions that contradict each other, unless the covariance matrix is diagonal. With an empirical example, the present note demonstrates that the GIRF may yield quite misleading economic inferences.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17014.

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Date of creation: Apr 2009
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Handle: RePEc:pra:mprapa:17014

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Keywords: Generalized Impulse Response Function; Orthogonalized Impulse Response Function; Vector Autoregressive Models;

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  1. Boyd, Derick & Caporale, Gugielmo Maria & Smith, Ron, 2001. "Real Exchange Rate Effects on the Balance of Trade: Cointegration and the Marshall-Lerner Condition," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(3), pages 187-200, July.
  2. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  3. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
  4. Huang, Ying & Neftci, Salih N. & Guo, Feng, 2008. "Swap curve dynamics across markets: Case of US dollar versus HK dollar," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 79-93, February.
  5. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  6. Cheung, Yin-Wong & Lai, Kon S. & Bergman, Michael, 2004. "Dissecting the PPP puzzle: the unconventional roles of nominal exchange rate and price adjustments," Journal of International Economics, Elsevier, vol. 64(1), pages 135-150, October.
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Cited by:
  1. Gao, Liping & Kim, Hyeongwoo & Saba, Richard, 2013. "How Does the Oil Price Shock Affect Consumers?," MPRA Paper 49565, University Library of Munich, Germany.
  2. Kim, Hyeongwoo, 2012. "VECM estimations of the PPP reversion rate revisited: The conventional role of relative price adjustment restored," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 223-238.
  3. Hyeongwoo Kim & Henry Thompson, 2012. "Wages in a Factor Proportions Model with Energy Input," Auburn Economics Working Paper Series auwp2012-05, Department of Economics, Auburn University.
  4. Ülkü, Numan & Demirci, Ebru, 2012. "Joint dynamics of foreign exchange and stock markets in emerging Europe," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 55-86.
  5. Bastos, Fabiano & Angelo Divino, Jose, 2009. "Exchange rate and output fluctuations in the small open economy of Mauritius," Policy Research Working Paper Series 5065, The World Bank.
  6. T. Randolph Beard & George Ford & Hyeongwoo Kim, 2013. "Capital Investment and Employment in the Information Sector," Auburn Economics Working Paper Series auwp2013-14, Department of Economics, Auburn University.
  7. Kim, Hyeongwoo & Thompson, Henry, 2009. "Factor Proportions Wages in a Structural Vector Autoregression," MPRA Paper 17798, University Library of Munich, Germany.

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