Working Paper: CEPR ID: DP13613
Authors: Michael R. Wickens
Abstract: A key issue in VAR analysis is how best to identify economic shocks. The paper discusses the problems that the standard methods pose and proposes a new type of shock. Named an idiosyncratic shock, it is designed to identify the component in each VAR residual associated with the corresponding VAR variable. The procedure is applied to a calibrated New Keynesian model and to a VAR based on the same variables and using US data. The resulting impulse response functions are compared with those from standard procedures.
Keywords: VAR analysis; macroeconomic shocks; New Keynesian model
JEL Codes: C32; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idiosyncratic shocks (D89) | components in VAR residuals that are uncorrelated with other residuals (C29) |
| monetary policy tightening (E63) | negative idiosyncratic shocks to inflation (E31) |
| negative inflation disturbances (E31) | negative idiosyncratic shocks to inflation (E31) |
| positive idiosyncratic shock to the federal funds rate (E49) | positive effects on inflation (E31) |
| positive idiosyncratic shock to the federal funds rate (E49) | positive effects on the output gap (E23) |
| residual shocks (C22) | minimal effects on inflation (E31) |
| Choleski shocks (C10) | minimal effects on inflation (E31) |