Reduced-Rank Identification of Structural Shocks in VARs
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Yuriy Gorodnichenko: University of Michigan
Macroeconomics from EconWPA
This paper integrates imposing a factor structure on residuals in vector autoregressions (VARs) into structural VAR analysis. Identification, estimation and testing procedures are discussed. The paper applies this approach to the well-known problem of studying the effects of monetary policy in open economy VAR models. The use of factor structure in identifying structural shocks is shown to resolve three long-standing puzzles in VAR literature. First, the price level does not increase in response to a monetary tightening. Second, the exchange rate appreciates on impact and then gradually depreciates. Hence, no price level and exchange rate puzzles are found. Third, monetary policy shocks are much less volatile than suggested by standard VAR identification schemes. In addition, the paper suggests that the apparent weak contemporaneous cross-variable responses and strong own responses in structural VARs can be an artifact of identifying assumptions and vanish after imposing a factor structure on the shocks.
Keywords: Vector autoregressions; identification; factor structure; monetary policy (search for similar items in EconPapers)
JEL-codes: E52 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-ifn and nep-mac
Note: Type of Document - pdf; pages: 36
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0512011
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