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Shock Restricted Structural Vector-Autoregressions

Listed author(s):
  • Sydney C. Ludvigson
  • Sai Ma
  • Serena Ng

Identifying assumptions need to be imposed on autoregressive models before they can be used to analyze the dynamic effects of economically interesting shocks. Often, the assumptions are only rich enough to identify a set of solutions. This paper considers two types of restrictions on the structural shocks that can help reduce the number of plausible solutions. The first is imposed on the sign and magnitude of the shocks during unusual episodes in history. The second restricts the correlation between the shocks and components of variables external to the autoregressive model. These non-linear inequality constraints can be used in conjunction with zero and sign restrictions that are already widely used in the literature. The effectiveness of our constraints are illustrated using two applications of the oil market and Monte Carlo experiments calibrated to study the role of uncertainty shocks in economic fluctuations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23225.

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Date of creation: Mar 2017
Handle: RePEc:nbr:nberwo:23225
Note: AP EFG ME
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  1. Hyungsik Roger Moon & Frank Schorfheide & Eleonora Granziera & Mihye Lee, 2011. "Inference for VARs Identified with Sign Restrictions," NBER Working Papers 17140, National Bureau of Economic Research, Inc.
  2. Juan F. Rubio-Ramírez & Daniel F. Waggoner & Tao Zha, 2010. "Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 665-696.
  3. Lutz Kilian, 2008. "Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy?," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 216-240, May.
  4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  5. Lutz Kilian & Daniel P. Murphy, 2012. "Why Agnostic Sign Restrictions Are Not Enough: Understanding The Dynamics Of Oil Market Var Models," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1166-1188, October.
  6. Antolin-Diaz, Juan & Rubio-Ramírez, Juan Francisco, 2016. "Narrative Sign Restrictions for SVARs," CEPR Discussion Papers 11517, C.E.P.R. Discussion Papers.
  7. Hyungsik Roger Moon & Frank Schorfheide, 2012. "Bayesian and Frequentist Inference in Partially Identified Models," Econometrica, Econometric Society, vol. 80(2), pages 755-782, 03.
  8. Valerie A. Ramey, 2016. "Macroeconomic Shocks and Their Propagation," NBER Working Papers 21978, National Bureau of Economic Research, Inc.
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