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Impulse Response Priors for Discriminating Structural Vector Autoregressions

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  • Mark Dwyer

    (UCLA)

Abstract

The structural vector autoregression (SVAR) has become a central tool for research in empirical macroeconomics. Because the vast majority of these models are exactly identified, researchers have traditionally relied upon the informal use of prior information to compare alternative specifications. This paper surveys some of the structural dynamic restrictions used to evaluate SVARs. I provide a method for constructing prior distributions that incorporates this information on impulse responses. Based upon these Impulse Response Priors (IRPs) I employ a formal Bayesian model selection procedure for comparing SVAR specifications. I use this procedure to compare several alternative, six variable SVAR models of the interaction of real and monetary sectors of the U.S. economy. I make these comparisons under a variety of assumptions regarding the nature of the money supply rule, and lag length. Emprically, I find strong evidence in favor of interpreting shocks to the federal funds rate as monetary policy shocks, as opposed to shocks to nonborrowed reserves. The most favored identification is one in which monetary policy reacts to contemporaneous movements in real variables and the price level. There is less evidence that monetary policy reacts as quickly to fluctuations in money demand.

Suggested Citation

  • Mark Dwyer, 1998. "Impulse Response Priors for Discriminating Structural Vector Autoregressions," Econometrics 9808001, EconWPA.
  • Handle: RePEc:wpa:wuwpem:9808001 Note: Type of Document - PDF; prepared on IBM PC - OS/2-LaTeX2e; to print on HP/PostScript/etc; pages: 35; figures: included
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    References listed on IDEAS

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    Cited by:

    1. Andrzej Kociêcki, 2003. "On Priors for Impulse Responses in Bayesian Structural VAR Models," Econometrics 0307006, EconWPA.
    2. Marco Del Negro & Frank Schorfheide, 2004. "Priors from General Equilibrium Models for VARS," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 643-673, May.

    More about this item

    Keywords

    Structural Vector Autoregression; Exact Identification; Impulse Responses; Priors; Bayes Factors; Importance Sampling; Monetary Policy;

    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
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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