Structural VARs, Deterministic and Stochastic Trends: Does Detrending Matter?

Varang Wiriyawit and Benjamin Wong

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We highlight how detrending within Structural Vector Autoregressions (SVAR) is directly linked to the shock identification. Consequences of trend misspecification are investigated using a prototypical Real Business Cycle model as the Data Generating Process. Decomposing the different sources of biases in the estimated impulse response functions, we find the biases arising directly from trend misspecification are not trivial when compared to other widely studied misspecifications. Our example also illustrates how misspecifying the trend can also distort impulse response functions of even the correctly detrended variable within the SVAR system.

Keywords: Structural VAR; Identification; Detrending; Bias (search for similar items in EconPapers)
JEL-codes: C15 C32 C51 E37 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2014-06
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://cama.crawford.anu.edu.au/sites/default/fil ... 4_wiriyawit_wong.pdf (application/pdf)

Related works:
Journal Article: Structural VARs, deterministic and stochastic trends: how much detrending matters for shock identification (2016)
Working Paper: Structural VARs, deterministic and stochastic trends: Does detrending matter? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2014-46

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