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Reducing Confidence Bands for Simulated Impulse Responses

Helmut Lütkepohl ()

No 1235, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: It is emphasized that the shocks in structural vector autoregressions are only identified up to sign and it is pointed out that this feature can result in very misleading confidence intervals for impulse responses if simulation methods such as Bayesian or bootstrap methods are used. The confidence intervals heavily depend on which variable is used for fixing the sign of the initial responses. In particular, when the shocks are identified via long-run restrictions the problem can be severe. It is pointed out that a suitable choice of variable for fixing the sign of the initial responses can result in substantial reductions in the confidence bands for impulse responses.

Keywords: Vector autoregressive process; impulse responses; bootstrap; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2012
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Journal Article: Reducing confidence bands for simulated impulse responses (2013) Downloads
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