What Can We Learn from Sign-Restricted VARs?
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pandp.20221045.pdf
Description
Published version
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527.19 KB
Format
Adobe PDF
Checksum (MD5)
db128bdbb10ee0bc94c1c69272da1e71
Author(s)
Wolf, Christian K
Date Issued
May 1, 2022
Journal
AEA Papers and Proceedings
Publisher
American Economic Association
Citation
Wolf, Christian K. 2022. "What Can We Learn from Sign-Restricted VARs?." AEA Papers and Proceedings, 112.
Version
Final published version
Abstract
I use a simple business cycle model to illustrate the workings and limitations of sign restrictions in structural vector autoregressions. Three lessons emerge. First, such sign-based identification is vulnerable to “shock masquerading”: linear combinations of other shocks may be misidentified as the shock of interest. Second, since the popular Haar prior automatically overweights more volatile shocks, the implied posterior is decisively shaped by relative shock volatilities--a feature of shocks that has nothing to do with their dynamic causal effects. Third, sign restrictions on structural elasticities--rather than just the usual restrictions on impulse responses--can be highly informative.
MIT Department
Massachusetts Institute of Technology. Department of Economics
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Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1257/pandp.20221045
