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Low Frequency Movements and SVAR Analyses

Author

Listed:
  • Canova, Fabio
  • Fosso, Luca

Abstract

We study the consequences of using a deterministic steady state in Vector Autoregressive (VAR) models, when the data may display structural breaks, transitional dynamics or low-frequency fluctuations. We document upward biases in the estimated coefficients. Distortions are amplified by the identification scheme. Allowing the steady state to be stochastic reduces the biases. We propose a spike-and-slab prior to differentiate between the two alternative long-run specifications. We revisit two well-known controversies: (i) the dynamics of hours in response to technology shocks; (ii) the habit formation hypothesis and the hump-shaped response of consumption and inflation to income shocks.

Suggested Citation

  • Canova, Fabio & Fosso, Luca, 2026. "Low Frequency Movements and SVAR Analyses," CEPR Discussion Papers 21205, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:21205
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    File URL: https://cepr.org/publications/DP21205
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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