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Identifying Shocks via Time-Varying Volatility
[First Order Autoregressive Processes and Strong Mixing]

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  • Daniel J Lewis

Abstract

I propose to identify an SVAR, up to shock ordering, using the autocovariance structure of the squared innovations implied by an arbitrary stochastic process for the shock variances. These higher moments are available without parametric assumptions on the variance process. In contrast, previous approaches exploiting heteroskedasticity rely on the path of innovation covariances, which can only be recovered from the data under specific parametric assumptions on the variance process. The conditions for identification are testable. I compare the identification scheme to existing approaches in simulations and provide guidance for estimation and inference. I use the methodology to estimate fiscal multipliers peaking at 0.86 for tax cuts and 0.75 for government spending. I find that tax shocks explain more variation in output at longer horizons. The empirical implications of my estimates are more consistent with theory and the narrative record than those based on some leading approaches.

Suggested Citation

  • Daniel J Lewis, 2021. "Identifying Shocks via Time-Varying Volatility [First Order Autoregressive Processes and Strong Mixing]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(6), pages 3086-3124.
  • Handle: RePEc:oup:restud:v:88:y:2021:i:6:p:3086-3124.
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    File URL: http://hdl.handle.net/10.1093/restud/rdab009
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    More about this item

    Keywords

    Identification; Structural shocks; SVAR; Fiscal multiplier; Tax shocks; Time-varying volatility; Heteroskedasticity;
    All these keywords.

    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; State Space Models
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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