Sign Restrictions and Supply-Demand Decompositions of Inflation

Matthew Read

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

Abstract: Sign restrictions on the slopes of supply and demand curves are often used to identify historical decompositions in structural vector autoregressions. I show that the identifying power of these restrictions depends on both reduced-form parameters and realised forecast errors. Consequently, unlike many other structural objects, the strength of identification cannot be assessed from reduced-form parameters alone. Empirically, identified sets for historical decompositions of US inflation are typically largely uninformative, both in aggregate and in most expenditure categories. Existing inflation decompositions are therefore sensitive to auxiliary assumptions used to select among observationally equivalent models.

Keywords: historical decomposition; set identification; sign restrictions; structural vector autoregression (search for similar items in EconPapers)
JEL-codes: C32 E31 E32 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2026-09
New Economics Papers: this item is included in nep-ets and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2026-82

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