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Structural VARs, Deterministic and Stochastic Trends: Does Detrending Matter?

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  • Varang Wiriyawit
  • Benjamin Wong

Abstract

We highlight how detrending within Structural Vector Autoregressions (SVAR) is directly linked to the shock identification. Consequences of trend misspecification are investigated using a prototypical Real Business Cycle model as the Data Generating Process. Decomposing the different sources of biases in the estimated impulse response functions, we find the biases arising directly from trend misspecification are not trivial when compared to other widely studied misspecifications. Our example also illustrates how misspecifying the trend can also distort impulse response functions of even the correctly detrended variable within the SVAR system.

Suggested Citation

  • Varang Wiriyawit & Benjamin Wong, 2014. "Structural VARs, Deterministic and Stochastic Trends: Does Detrending Matter?," CAMA Working Papers 2014-46, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2014-46
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-06/46_2014_wiriyawit_wong.pdf
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    Cited by:

    1. Elekdag, Selim & Han, Fei, 2015. "What drives credit growth in emerging Asia?," Journal of Asian Economics, Elsevier, vol. 38(C), pages 1-13.

    More about this item

    Keywords

    Structural VAR; Identification; Detrending; Bias;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: 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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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