A Back-of-the-Envelope Rule to Identify Atheoretical VARs

Carlos Urzúa

No 2007-03, EGAP Working Papers from Tecnológico de Monterrey, Campus Ciudad de México

Abstract: Vector autoregressive models are often used in Macroeconomics to draw conclusions about the effects of policy innovations. However, those results depend on the researcher’s priors about the particular ordering of the variables. As an alternative, this paper presents a simple rule based on the Maximum Entropy principle that can be used to find the “most likely” ordering. The proposal is illustrated in the case of a VAR model of the U.S. economy. It is found that monetary policy shocks are better represented by innovations in the federal funds rate rather than by innovations in non-borrowed reserves.

Keywords: VAR; impulse-response functions; varimin; maximum entropy; monetary policy shocks (search for similar items in EconPapers)
JEL-codes: C32 C51 E52 (search for similar items in EconPapers)
Date: 2007-02
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ets and nep-mac
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Journal Article: A Back-of-the-Envelope Rule to Identify Atheoretical VARs (2008)
Software Item: A Back-of-the-Envelope Rule to Identify Atheoretical VARs (2006)
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