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Identifying the Shocks also Identifies the Constants: Implications for VAR analysis

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  • Mountford, Andrew

Abstract

Restrictions on the contemporaneous effects matrix used to identify fundamental shocks in a structural VAR, also determine the mapping from the structural constant terms to the reduced form constant terms. In some models one will have priors about these structural constant terms and these should therefore be included in a Bayesian estimation procedure. We illustrate the significance of this using a standard 3 variable VAR estimated in Baumeister and Hamilton (2018). We show that imposing priors over the structural constant terms can lead to a more intuitive estimated monetary policy rule and a larger role for monetary policy in describing the evolution of the data, particularly for inflation.

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  • Mountford, Andrew, 2025. "Identifying the Shocks also Identifies the Constants: Implications for VAR analysis," MPRA Paper 126806, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:126806
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    References listed on IDEAS

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    1. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
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    3. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
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    6. Canova, Fabio & Nicolo, Gianni De, 2002. "Monetary disturbances matter for business fluctuations in the G-7," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1131-1159, September.
    7. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
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    JEL classification:

    • 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
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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