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How useful is Structural VAR Analysis for Irish economics?

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  • McCoy, Daniel

    (Central Bank and Financial Services Authority of Ireland)

Abstract

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.

Suggested Citation

  • McCoy, Daniel, 1997. "How useful is Structural VAR Analysis for Irish economics?," Research Technical Papers 2/RT/97, Central Bank of Ireland.
  • Handle: RePEc:cbi:wpaper:2/rt/97
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    Cited by:

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    2. Daniel McCoy, & McMahon, Michael, 2000. "Differences in the Transmission of Monetary Policy in the Euro-Area: An Empirical Approach," Research Technical Papers 5/RT/00, Central Bank of Ireland.
    3. Levent, Korap, 2007. "Structural VAR identification of the Turkish business cycles," MPRA Paper 21971, University Library of Munich, Germany.
    4. Selim KAYHAN & Muhsin KAR & Ahmet ŞAHBAZ, 2015. "Is CPI a suitable tool for inflation targeting? A critical view," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(604), A), pages 21-38, Autumn.
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    7. Erdem Ekrem & Kayhan Selim, 2011. "The Taylor Rule in Estimating the Performance of Inflation Targeting Programs: The Case of Turkey," Global Economy Journal, De Gruyter, vol. 11(1), pages 1-17, March.
    8. Adriana AnaMaria DAVIDESCU, 2014. "Evaluating The Relationship Between Official Economy And Shadow Economy In Romania. A Structural Vector Autoregressive Approach," Journal of Social and Economic Statistics, Bucharest University of Economic Studies, vol. 3(2), pages 57-65, DECEMBER.
    9. Ahmet Ugur & Yusuf Ekrem Akbas & Mehmet Senturk, 2014. "Long Term Validity of Monetary Exchange Rate Model: Evidence from Turkey," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 17(51), pages 111-136, March.
    10. Florian Verheyen, 2010. "Monetary Policy, Commodity Prices and Infl ation – Empirical Evidence from the US," Ruhr Economic Papers 0216, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    11. Adebayo Augustine Kutu & Harold Ngalawa, 2016. "Monetary Policy Shocks and Industrial Sector Performance in South Africa," Journal of Economics and Behavioral Studies, AMH International, vol. 8(3), pages 26-40.
    12. Verheyen, Florian, 2010. "Monetary Policy, Commodity Prices and Infl ation – Empirical Evidence from the US," Ruhr Economic Papers 216, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
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    14. Sheefeni, Johannes P.S., 2020. "Money Channel of Monetary Policy Transmission in Namibia," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 73(1), pages 131-150.
    15. Roseline Nyakerario Misati & Esman Morekwa Nyamongo & Isaac Mwangi, 2013. "Commodity price shocks and inflation in a net oil-importing economy," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 37(2), pages 125-148, June.
    16. Söylemez, Arif Orçun, 2020. "How Do Volatility and Return Series Interact?," MPRA Paper 104687, University Library of Munich, Germany.
    17. Rafael Ravnik & Ivan Zilic, 2011. "The use of SVAR analysis in determining the effects of ?scal shocks in Croatia," Financial Theory and Practice, Institute of Public Finance, vol. 35(1), pages 25-58.
    18. repec:agr:journl:v:3(604):y:2015:i:3(604):p:21-38 is not listed on IDEAS
    19. Dermot Hodson, 2003. "The Exchange Rate as an Adjustment Mechanism - A Structural VAR Approach to the Case of Ireland," The Economic and Social Review, Economic and Social Studies, vol. 34(2), pages 151-172.
    20. Jelena Zubkova & Egils Kauzens & Ivars Tillers & Martins Prusis, 2002. "Financial Market in Latvia," Working Papers 2002/02, Latvijas Banka.

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