Infinite-variance, Alpha-stable Shocks in Monetary SVAR: Final Working Paper Version

Greg Hannsgen

Economics Working Paper Archive from Levy Economics Institute

Abstract: This paper adumbrates a theory of what might be going wrong in the monetary SVAR literature and provides supporting empirical evidence. The theory is that macroeconomists may be attempting to identify structural forms that do not exist, given the true distribution of the innovations in the reduced-form VAR. The paper shows that this problem occurs whenever (1) some innovation in the VAR has an infinite-variance distribution and (2) the matrix of coefficients on the contemporaneous terms in the VAR's structural form is nonsingular. Since (2) is almost always required for SVAR analysis, it is germane to test hypothesis (1). Hence, in this paper, we fit a-stable distributions to VAR residuals and, using a parametric-bootstrap method, test the hypotheses that each of the error terms has finite variance.

Keywords: Vector Autoregression; Levy-stable Distribution; Infinite Variance; Monetary Policy Shocks; Heavy-tailed Error Terms; Factorization; Impulse-Response Function (search for similar items in EconPapers)
JEL-codes: C32 C46 C50 E30 E52 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-ets and nep-mon
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