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Three questions regarding impulse responses and their interpretation found from sign restrictions

Author

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  • Sam Ouliaris
  • Adrian Pagan

Abstract

When sign restrictions are used in SVARs impulse responses are only set identified. If sign restrictions are just given for a single shock the shocks may not be separated, and so the resulting structural equations can be unacceptable. Thus, in a supply demand model, if only signs are given for the impulse responses to a demand shock this may result in two supply curves being in the SVAR. One needs to find the identified set so that this effect is excluded. Granziera el al’s (2018) frequentist approach to inference potentially suffers from this issue. One also has to recognize that the identified set should be adjusted so that it produces responses to the same size shock. Finally, because researchers are often unwilling to set out sign restrictions to separate all shocks, we describe how this can be done with a SVAR/VAR system rather than a straight SVAR.

Suggested Citation

  • Sam Ouliaris & Adrian Pagan, 2020. "Three questions regarding impulse responses and their interpretation found from sign restrictions," CAMA Working Papers 2020-101, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2020-101
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2020-11/101_2020_ouliaris_pagan.pdf
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    More about this item

    Keywords

    SVAR; Sign Restrictions; Identified Set;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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