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The efficient market hypothesis and identification in structural VARs

  • Lucio Sarno
  • Daniel L. Thornton

Structural vector autoregression (SVAR) models are commonly used to investigate the effect of structural shocks on economic variables. The identifying restrictions imposed in many of these exercises have been criticized in the literature. This paper extends this literature by showing that, if the SVAR includes one or more variables that are efficient in the strong form of the efficient market hypothesis, the identifying restrictions frequently imposed in SVARs cannot be satisfied. The authors argue that this analysis will likely apply to VARs that include variables that are consistent with weaker forms of the efficient market hypothesis, especially when the data are measured at the monthly or quarterly frequencies, as is frequently the case.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2004)
Issue (Month): Jan ()
Pages: 49-60

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Handle: RePEc:fip:fedlrv:y:2004:i:jan:p:49-60:n:v.86no.1
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  1. Lucio Sarno & Daniel L. Thornton, 2002. "The dynamic relationship between the federal funds rate and the Treasury bill rate: an empirical investigation," Working Papers 2000-032, Federal Reserve Bank of St. Louis.
  2. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January.
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  8. Olivier J. Blanchard & Mark W. Watson, 1986. "Are Business Cycles All Alike?," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 123-180 National Bureau of Economic Research, Inc.
  9. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
  10. Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 283-308, November.
  11. Pesaran, M. H., 1981. "Identification of rational expectations models," Journal of Econometrics, Elsevier, vol. 16(3), pages 375-398, August.
  12. Roley, V Vance & Walsh, Carl E, 1985. "Monetary Policy Regimes, Expected Inflation, and the Response of Interest Rates to Money Announcements," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 1011-39, Supp..
  13. Garfinkel, Michelle R & Thornton, Daniel L, 1995. "The Information Content of the Federal Funds Rate: Is It Unique?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 838-47, August.
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