Structural VARs, deterministic and stochastic trends: Does detrending matter?

Benjamin Wong and Varang Wiriyawit
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Varang Wiriyawit: Reserve Bank of New Zealand, http://www.rbnz.govt.nz

No DP2015/02, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: We highlight how detrending within Structural Vector Autoregressions (SVAR) is directly linked to the shock identification. Consequences of trend misspecification are investigated using a prototypical Real Business Cycle model as the Data Generating Process. Decomposing the different sources of biases in the estimated impulse response functions, we find the biases arising directly from trend misspecification are not trivial when compared to other widely studied misspecifications. Misspecifying the trend can also distort impulse response functions of even the correctly detrended variable within the SVAR system. A possible solution hinted by our analysis is that increasing the lag order when estimating the SVAR may mitigate some of the biases associated with trend misspecification.

Pages: 11 p.
Date: 2015-04
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
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Related works:
Journal Article: Structural VARs, deterministic and stochastic trends: how much detrending matters for shock identification (2016)
Working Paper: Structural VARs, Deterministic and Stochastic Trends: Does Detrending Matter? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:nzb:nzbdps:2015/02

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