Working Paper: CEPR ID: DP14271
Authors: Christiane Baumeister; James Hamilton
Abstract: This paper discusses the problems associated with using information about the signs of certain magnitudes as a basis for drawing structural conclusions in vector autoregressions. We also review available tools to solve these problems. For illustration we use Dahlhaus and Vasishtha’s (2019) study of the effects of a U.S. monetary contraction on capital flows to emerging markets. We explain why sign restrictions alone are not enough to allow us to answer the question and suggest alternative approaches that could be used.
Keywords: structural vector autoregressions; sign restrictions; identified set; informative priors; bayesian inference; monetary policy; capital flows
JEL Codes: C30; E5; F2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Contractionary monetary policy in the US (E52) | Reduced capital flows to emerging markets (F32) |
| Improved US economic fundamentals (F69) | Reduced capital flows to emerging markets (F32) |
| Tighter monetary stance without changes in economic fundamentals (E49) | Preference for US financial instruments (G15) |
| Preference for US financial instruments (G15) | Reduced capital flows to emerging markets (F32) |
| Contractionary monetary policy in the US (E52) | Preference for US financial instruments (G15) |