# Identification of Economic Shocks by Inequality Constraints in Bayesian Structural Vector Autoregression

*Markku Lanne* and
*Jani Luoto*

*Oxford Bulletin of Economics and Statistics*, 2020, vol. 82, issue 2, 425-452

**Abstract:**
Theories often make predictions about the signs of the effects of economic shocks on observable variables, thus implying inequality constraints on the parameters of a structural vector autoregression (SVAR). We introduce a new Bayesian procedure to evaluate the probabilities of such constraints, and, hence, to validate the theoretically implied economic shocks. We first estimate a SVAR, where the shocks are identified by statistical properties of the data, and subsequently label these statistically identified shocks by the Bayes factors calculated from their probabilities of satisfying given inequality constraints. In contrast to the related sign restriction approach that also makes use of theoretically implied inequality constraints, no restrictions are imposed. Hence, it is possible that only a subset or none of the theoretically implied shocks can be labelled. In the latter case, we conclude that the data do not lend support to the theory implying the signs of the effects in question. We illustrate the method by empirical applications to the crude oil market, and U.S. monetary policy.

**Date:** 2020

**References:** Add references at CitEc

**Citations:** View citations in EconPapers (5) Track citations by RSS feed

**Downloads:** (external link)

https://doi.org/10.1111/obes.12338

**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:** https://EconPapers.repec.org/RePEc:bla:obuest:v:82:y:2020:i:2:p:425-452

**Ordering information:** This journal article can be ordered from

http://www.blackwell ... bs.asp?ref=0305-9049

Access Statistics for this article

Oxford Bulletin of Economics and Statistics is currently edited by *Christopher Adam*, *Anindya Banerjee*, *Christopher Bowdler*, *David Hendry*, *Adriaan Kalwij*, *John Knight* and *Jonathan Temple*

More articles in Oxford Bulletin of Economics and Statistics from Department of Economics, University of Oxford Contact information at EDIRC.

Bibliographic data for series maintained by Wiley Content Delivery ().