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Inference in Structural Vector Autoregressions When the Identifying Assumptions are Not Fully Believed: Re-evaluating the Role of Monetary Policy in Economic Fluctuations

Author

Listed:
  • Christiane Baumeister
  • James D. Hamilton

Abstract

Reporting point estimates and error bands for structural vector autoregressions that are only set identified is a very common practice. However, unless the researcher is persuaded on the basis of prior information that some parameter values are more plausible than others, this common practice has no formal justification. When the role and reliability of prior information is defended, Bayesian posterior probabilities can be used to form an inference that incorporates doubts about the identifying assumptions. We illustrate how prior information can be used about both structural coefficients and the impacts of shocks, and propose a new distribution, which we call the asymmetric t distribution, for incorporating prior beliefs about the signs of equilibrium impacts in a nondogmatic way. We apply these methods to a three-variable macroeconomic model and conclude that monetary policy shocks were not the major driver of output, inflation, or interest rates during the Great Moderation.

Suggested Citation

  • Christiane Baumeister & James D. Hamilton, 2018. "Inference in Structural Vector Autoregressions When the Identifying Assumptions are Not Fully Believed: Re-evaluating the Role of Monetary Policy in Economic Fluctuations," NBER Working Papers 24597, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24597
    Note: EFG ME
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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