Macroeconomic Responses to Uncertainty Shocks: The Perils of Recursive Orderings

Lutz Kilian, Michael D. Plante and Alexander Richter

Journal of Applied Econometrics, 2025, vol. 40, issue 4, 395-410

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 and show by simulation that this practice is invalid, whether the data generating process is a structural VAR model or a dynamic stochastic general equilibrium model. Simulation evidence suggests that the underlying identification challenge can be addressed using an instrumental variables estimator.

Date: 2025
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https://doi.org/10.1002/jae.3113

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)
Working Paper: Macroeconomic responses to uncertainty shocks: The perils of recursive orderings (2022)
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