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How useful is Structural VAR Analysis for Irish economics?

  • McCoy, Daniel

    (Central Bank and Financial Services Authority of Ireland)

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    The purpose of this paper is to provide an introduction to the methodology known as Structural Vector Autoregression (SVAR) analysis and to examine its applicability in the context of Irish macroeconomics. The SVAR approach has been developed over the last decade to interpret business cycle fluctuations and to help identify the effects of different economic policies. It is an extension on the traditional atheoretic VAR approach in that it combines economic theory with time-series analysis to determine the dynamic response of economic variables to various disturbances. The main advantage with SVAR analysis is that the necessary restrictions on the estimated reduced form model, required for identification of the underlying structural model, can be provided by economic theory. These restrictions can be either contemporaneous or long-run in nature depending on whether the underlying disturbances are considered to be temporary or permanent in nature. Once the identification is achieved it is possible to recover the structural shocks. These shocks can then be used to generate impulse response and variance decomposition functions to assess the dynamic impacts on different economic variables. In addition these functions can be used to test whether such shocks affect the economic variables as economic theory would predict so providing a check on the theory. SVAR analysis has been used internationally to examine a variety of research topics, such as asymmetric shocks from monetary union and impacts of exchange rate movements. A number of research topics in the Irish context that could benefit from SVAR analysis are identified. These topics relate mainly to areas of inflation, exchange rate and monetary policy. The SVAR is an important and useful methodology that is worthy of more attention by the Irish economics community than it currently receives.

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    File URL: http://www.centralbank.ie/publications/documents/2RT97.pdf
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    Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 2/RT/97.

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    Length: 26 pages
    Date of creation: Apr 1997
    Date of revision:
    Handle: RePEc:cbi:wpaper:2/rt/97
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    1. Eichengreen, Barry, 1996. "EMU: An Outsider's Perspective," Center for International and Development Economics Research, Working Paper Series qt2m60n639, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
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    4. Richard Clarida & Mark Gertler, 1996. "How the Bundesbank Conducts Monetary Policy," NBER Working Papers 5581, National Bureau of Economic Research, Inc.
    5. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
    6. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    7. Maurice Obstfeld, 1985. "Floating Exchange Rates: Experience and Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 369-464.
    8. Mark S Astley & Anthony Garratt, 1998. "Exchange rates and prices: sources of sterling real exchange rate fluctuations 1973-94," Bank of England working papers 85, Bank of England.
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