Three questions regarding impulse responses and their interpretation found from sign restrictions

Sam Ouliaris and Adrian Pagan

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

Abstract: When sign restrictions are used in SVARs impulse responses are only set identified. If sign restrictions are just given for a single shock the shocks may not be separated, and so the resulting structural equations can be unacceptable. Thus, in a supply demand model, if only signs are given for the impulse responses to a demand shock this may result in two supply curves being in the SVAR. One needs to find the identified set so that this effect is excluded. Granziera el al’s (2018) frequentist approach to inference potentially suffers from this issue. One also has to recognize that the identified set should be adjusted so that it produces responses to the same size shock. Finally, because researchers are often unwilling to set out sign restrictions to separate all shocks, we describe how this can be done with a SVAR/VAR system rather than a straight SVAR.

Keywords: SVAR; Sign Restrictions; Identified Set (search for similar items in EconPapers)
JEL-codes: C51 C52 E37 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2020-11
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2020-101

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