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How to advance theory with structural VARs: use the Sims-Cogley-Nason approach

  • Patrick J. Kehoe

The common approach to evaluating a model in the structural VAR literature is to compare the impulse responses from structural VARs run on the data to the theoretical impulse responses from the model. The Sims-Cogley-Nason approach instead compares the structural VARs run on the data to identical structural VARs run on data from the model of the same length as the actual data. Chari, Kehoe, and McGrattan (2006) argue that the inappropriate comparison made by the common approach is the root of the problems in the SVAR literature. In practice, the problems can be solved simply. Switching from the common approach to the Sims-Cogley-Nason approach basically involves changing a few lines of computer code and a few lines of text. This switch will vastly increase the value of the structural VAR literature for economic theory.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 379.

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Date of creation: 2006
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Publication status: Published in NBER Macroeconomics Annual 2006
Handle: RePEc:fip:fedmsr:379
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  1. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 533-63, July.
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  3. Jesús Fernández-Villaverde & Juan Francisco Rubio-Ramírez & Thomas Sargent, 2005. "A, B, C’s, (and D’s) for understanding VARs," Working Paper 2005-09, Federal Reserve Bank of Atlanta.
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  17. Robert E. Lucas Jr. & Nancy L. Stokey, 1984. "Money and Interest in Cash-In-Advance Economy," Discussion Papers 628, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Fernald, John, 2006. "Trend Breaks, Long-Run Restrictions and the Contractionary Effects of Technology Improvements," CEPR Discussion Papers 5631, C.E.P.R. Discussion Papers.
  19. Larry Christiano & Martin Eichenbaum, 1999. "The Research Agenda: Larry Christiano and Martin Eichenbaum write about their current research program on the monetary transmission mechanism," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 1(1), November.
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