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Generalized Impulse Response Analysis: General or Extreme?

Hyeongwoo Kim ()

No auwp2012-04, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: This note discusses a pitfall of using the generalized impulse response function (GIRF) in vector autoregressive (VAR) models (Pesaran and Shin, 1998). The GIRF is general because it is invariant to the ordering of the variables in the VAR. The GIRF, in fact, is extreme because it yields a set of response functions that are based on extreme identifying assumptions that contradict each other, unless the covariance matrix is diagonal. With a help of empirical examples, the present note demonstrates that the GIRF may yield quite misleading economic inferences.

Keywords: Generalized Impulse Response Function; Orthogonalized Impulse Response Function; Vector Autoregressive Models (search for similar items in EconPapers)
JEL-codes: C13 C32 C51 (search for similar items in EconPapers)
Date: 2012-07
New Economics Papers: this item is included in nep-ets
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Working Paper: Generalized Impulse Response Analysis: General or Extreme? (2009) Downloads
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