Inference Based on SVARs Identied with Sign and Zero Restrictions: Theory and Applications

Juan F Rubio-Ramirez, Jonas E. Arias and Daniel Waggoner

No 1338, Working Papers from BBVA Bank, Economic Research Department

Abstract: Are optimism shocks an important source of business cycle fluctuations? Are decit-nanced tax cuts better than decit-nanced spending to increase output? These questions have been previously studied using SVARs identied with sign and zero restrictions and the answers have been positive and denite in both cases. While the identication of SVARs with sign and zero restrictions is theoretically attractive because it allows the researcher to remain agnostic with respect to the responses of the key variables of interest, we show that current implementation of these techniques does not respect the agnosticism of the theory. These algorithms impose additional sign restrictions on variables that are seemingly unrestricted that bias the results and produce misleading condence intervals. We provide an alternative and ecient algorithm that does not introduce any additional sign restriction, hence preserving the agnosticism of the theory. Without the additional restrictions, it is hard to support the claim that either optimism shocks are an important source of business cycle fluctuations or decit-nanced tax cuts work best at improving output. Our algorithm is not only correct but also faster than current ones.

Keywords: Sign and Zero Restrictions; Optimism and Fiscal Shocks; SVARs (search for similar items in EconPapers)
JEL-codes: C10 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2013-12
New Economics Papers: this item is included in nep-ecm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Working Paper: Inference Based on SVARs Identified with Sign and Zero Restrictions: Theory and Applications (2016)
Working Paper: Inference Based on SVARs Identified with Sign and Zero Restrictions: Theory and Applications (2014)
Working Paper: Inference Based on SVARs Identified with Sign and Zero Restrictions: Theory and Applications (2014)
Working Paper: Inference Based on SVARs Identified with Sign and Zero Restrictions: Theory and Applications (2014)
Working Paper: Inference Based on SVARs Identified with Sign and Zero Restrictions: Theory and Applications (2014)
Working Paper: Inference Based on SVARs Identied with Sign and Zero Restrictions: Theory and Applications (2013)
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