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Bayesian inference in proxy SVARs with incomplete identification: Re-evaluating the validity of monetary policy instruments

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  • Nguyen, Lam

Abstract

Instrument validity cannot be tested in a just-identified model, and it is not clear what conclusion to draw when instrument validity is rejected in an over-identified model. In practice, researchers tend to regard instruments as valid when they lead to sensible inferences. This paper develops a proxy structural vector autoregression with imperfect confidence in instrument validity, enabling researchers to incorporate and investigate those prior beliefs alongside other identifying information such as sign restrictions. The empirical application offers a new explanation to the observation in Stock and Watson (2012) that shocks predicted by different monetary policy instruments are correlated with oil and fiscal policy shocks, but not with each other.

Suggested Citation

  • Nguyen, Lam, 2025. "Bayesian inference in proxy SVARs with incomplete identification: Re-evaluating the validity of monetary policy instruments," Journal of Monetary Economics, Elsevier, vol. 155(C).
    • Handle: RePEc:eee:moneco:v:155:y:2025:i:c:s0304393225000844
    DOI: 10.1016/j.jmoneco.2025.103813
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    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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