Macroeconomic Responses to Uncertainty Shocks: The Perils of Recursive Orderings

Lutz Kilian, Michael Plante and Alexander Richter

No 2223, Working Papers from Federal Reserve Bank of Dallas

Abstract: A common practice in empirical macroeconomics is to examine alternative recursive orderings of the variables in structural vector autoregressive (VAR) models. When the implied impulse responses look similar, the estimates are considered trustworthy. When they do not, the estimates are used to bound the true response without directly addressing the identification challenge. A leading example of this practice is the literature on the effects of uncertainty shocks on economic activity. We prove by counterexample that this practice is invalid in general, whether the data generating process is a structural VAR model or a dynamic stochastic general equilibrium model.

Keywords: Cholesky Decomposition; endogeneity; uncertainty; business cycle (search for similar items in EconPapers)
JEL-codes: C32 C51 E32 (search for similar items in EconPapers)
Pages: 22
Date: 2022-11-23
New Economics Papers: this item is included in nep-ecm and nep-ets
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Related works:
Working Paper: Macroeconomic Responses to Uncertainty Shocks: The Perils of Recursive Orderings (2022)
Working Paper: Macroeconomic Responses to Uncertainty Shocks: The Perils of Recursive Orderings (2022)
Working Paper: Macroeconomic responses to uncertainty shocks: The perils of recursive orderings (2022)
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DOI: 10.24149/wp2223

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