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Inference in Structural Vector Autoregressions When the Identifying Assumptions are Not Fully Believed: Re-evaluating the Role of Monetary Policy in Economic Fluctuations

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  • Baumeister, Christiane
  • Hamilton, James

Abstract

Reporting point estimates and error bands for structural vector autoregressions that are only set identified is a very common practice. However, unless the researcher is persuaded on the basis of prior information that some parameter values are more plausible than others, this common practice has no formal justification. When the role and reliability of prior information is defended, Bayesian posterior probabilities can be used to form an inference that incorporates doubts about the identifying assumptions. We illustrate how prior information can be used about both structural coefficients and the impacts of shocks, and propose a new distribution, which we call the asymmetric t distribution, for incorporating prior beliefs about the signs of equilibrium impacts in a nondogmatic way. We apply these methods to a three-variable macroeconomic model and conclude that monetary policy shocks were not the major driver of output, inflation, or interest rates during the Great Moderation.

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  • Baumeister, Christiane & Hamilton, James, 2018. "Inference in Structural Vector Autoregressions When the Identifying Assumptions are Not Fully Believed: Re-evaluating the Role of Monetary Policy in Economic Fluctuations," CEPR Discussion Papers 12911, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12911
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    Cited by:

    1. Knut Are Aastveit & Hilde C. Bjørnland & Jamie L. Cross, 2020. "Inflation expectations and the pass-through of oil prices," Working Paper 2020/5, Norges Bank.
    2. Martin Geiger & Jochen Güntner, 2019. "How are oil supply shocks transmitted to the U.S. economy?," Economics working papers 2019-13, Department of Economics, Johannes Kepler University Linz, Austria.
    3. Atsushi Inoue & Lutz Kilian, 2020. "The Role of the Prior in Estimating VAR Models with Sign Restrictions," Working Papers 2030, Federal Reserve Bank of Dallas.
    4. Michael T. Belongia & Peter N. Ireland, 2021. "A Classical View of the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(2-3), pages 333-366, March.
    5. Baumeister, Christiane & Hamilton, James, 2020. "Advances in Structural Vector Autoregressions with Imperfect Identifying Information," CEPR Discussion Papers 14603, C.E.P.R. Discussion Papers.
    6. Inoue, Atsushi & Kilian, Lutz, 2020. "Joint Bayesian inference about impulse responses in VAR models," CFS Working Paper Series 650, Center for Financial Studies (CFS).
    7. Doga Bilgin & Reinhard Ellwanger, 2019. "The Simple Economics of Global Fuel Consumption," Staff Working Papers 19-35, Bank of Canada.
    8. Rüth, Sebastian K., 2020. "Shifts in monetary policy and exchange rate dynamics: Is Dornbusch's overshooting hypothesis intact, after all?," Journal of International Economics, Elsevier, vol. 126(C).
    9. Cosmas Dery & Apostolos Serletis, 2021. "The Relative Importance of Monetary Policy, Uncertainty, and Financial Shocks," Open Economies Review, Springer, vol. 32(2), pages 311-333, April.
    10. Valenti, Daniele & Manera, Matteo & Sbuelz, Alessandro, 2020. "Interpreting the oil risk premium: Do oil price shocks matter?," Energy Economics, Elsevier, vol. 91(C).
    11. Laumer, Sebastian, 2020. "Government spending and heterogeneous consumption dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 114(C).
    12. Hristov, Nikolay & Hülsewig, Oliver & Scharler, Johann, 2020. "Unconventional monetary policy shocks in the euro area and the sovereign-bank nexus," Discussion Papers 19/2020, Deutsche Bundesbank.
    13. Sanghamitra Bandyopadhyay & Rui Sun, 2021. "How large is the effect of inequality on economic growth?," Economics Bulletin, AccessEcon, vol. 41(2), pages 523-531.
    14. Marek A. Dąbrowski & Łukasz Kwiatkowski & Justyna Wróblewska, 2020. "Sources of Real Exchange Rate Variability in Central and Eastern European Countries: Evidence from Structural Bayesian MSH-VAR Models," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 12(4), pages 369-412, December.
    15. Hristov, Nikolay & Hülsewig, Oliver & Wollmershäuser, Timo, 2020. "Capital flows in the euro area and TARGET2 balances," Journal of Banking & Finance, Elsevier, vol. 113(C).
    16. Camehl, Annika & Rieth, Malte, 2021. "Disentangling Covid-19, economic mobility, and containment policy shocks," IWH Discussion Papers 2/2021, Halle Institute for Economic Research (IWH).
    17. Christian Grisse, 2020. "The effect of monetary policy on the Swiss franc: an SVAR approach," Working Papers 2020-02, Swiss National Bank.
    18. Cheng, Kai & Yang, Yang, 2020. "Revisiting the effects of monetary policy shocks: Evidence from SVAR with narrative sign restrictions," Economics Letters, Elsevier, vol. 196(C).
    19. Geiger, Martin & Scharler, Johann, 2019. "How do consumers assess the macroeconomic effects of oil price fluctuations? Evidence from U.S. survey data," Journal of Macroeconomics, Elsevier, vol. 62(C).
    20. Antonio M. Conti & Elisa Guglielminetti & Marianna Riggi, 2019. "Labour productivity and the wageless recovery," Temi di discussione (Economic working papers) 1257, Bank of Italy, Economic Research and International Relations Area.
    21. Hasan, Iftekhar & Kwak, Boreum & Li, Xiang, 2020. "Financial technologies and the effectiveness of monetary policy transmission," IWH Discussion Papers 26/2020, Halle Institute for Economic Research (IWH).
    22. Baumeister, Christiane & Hamilton, James D., 2020. "Drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions," Journal of International Money and Finance, Elsevier, vol. 109(C).
    23. Annika Camehl & Malte Rieth, 2021. "Disentangling Covid-19, Economic Mobility, and Containment Policy Shocks," Tinbergen Institute Discussion Papers 21-018/VI, Tinbergen Institute.
    24. Oliver Morrissey & Lars Spreng, 2020. "Macroeconomic management on becoming an African oil exporter," Discussion Papers 2020-03, University of Nottingham, CREDIT.
    25. Oliver Hülsewig & Johann Scharler, 2020. "The Euro Area Periphery Sovereigns' Fiscal Positions and Unconventional Monetary Policy," CESifo Working Paper Series 8041, CESifo.

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    More about this item

    Keywords

    historical decompositions; impulse-response functions; informative priors; Model uncertainty; monetary policy; set identification; structural vector autoregressions;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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