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Three Basic Issues that Arise when Using Informational Restrictions in SVARs

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  • Sam Ouliaris
  • Adrian Pagan

Abstract

When sign or other informational restrictions are used in SVARs, impulse responses are only set identified. Three issues need to be addressed when finding such sets. One is that the restrictions must be sufficient to separate the shocks. Failure to do so can result in unacceptable structural equations, for example two supply curves in the SVAR. Another is the need to adjust the identified set so that the responses are to the same size shock. Otherwise the range of responses that are being found may simply reflect different shock sizes. The third issue is estimation of the SVAR when all the shocks are not separated. Researchers are often unwilling to set out sign restrictions to separate all shocks and so we describe what can be done to accommodate that attitude by using a triangular SVAR that parallels what is used with exact restrictions.

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  • Sam Ouliaris & Adrian Pagan, 2022. "Three Basic Issues that Arise when Using Informational Restrictions in SVARs," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(1), pages 1-20, February.
    • Handle: RePEc:bla:obuest:v:84:y:2022:i:1:p:1-20
    DOI: 10.1111/obes.12458
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    References listed on IDEAS

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    1. Fisher, Lance A. & Huh, Hyeon-seung, 2023. "Systematic monetary policy in a SVAR for Australia," Economic Modelling, Elsevier, vol. 128(C).

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