EconPapers    
Economics at your fingertips  
 

Reduced-Rank Identification of Structural Shocks in VARs

Yuriy Gorodnichenko
Additional contact information
Yuriy Gorodnichenko: University of Michigan

Macroeconomics from EconWPA

Abstract: 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
Date: 2005-12-15
Note: Type of Document - pdf; pages: 36
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (6) Track citations by RSS feed

Downloads: (external link)
http://econwpa.repec.org/eps/mac/papers/0512/0512011.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0512011

Access Statistics for this paper

More papers in Macroeconomics from EconWPA
Series data maintained by EconWPA ().

 
Page updated 2017-04-24
Handle: RePEc:wpa:wuwpma:0512011