Working Paper: CEPR ID: DP17698
Authors: Lutz Kilian; Michael D. Plante; Alexander W. Richter
Abstract: A common practice in empirical macroeconomics is to examine alternative recursive orderings of the variables in structural vector autogressive (VAR) models. When the implied impulse responses look similar, the estimates are considered trustworthy. When they do not, the estimates are used to bound the true response without directly addressing the identification challenge. A leading example of this practice is the literature on the effects of uncertainty shocks on economic activity. We prove by counterexample that this practice is invalid in general, whether the data generating process is a structural VAR model or a dynamic stochastic general equilibrium model.
Keywords: Cholesky decomposition; orthogonalization; simultaneity; endogeneity; uncertainty; business cycle
JEL Codes: C32; C51; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| alternative recursive orderings (C69) | true response to uncertainty shocks (D89) |
| simultaneous determination of uncertainty and economic activity (D89) | identification of uncertainty shock in VAR model (C32) |
| robustness across orderings (C69) | misleading conclusions about uncertainty shocks (D89) |
| ordering uncertainty first or last (C69) | upper or lower bounds on effects of uncertainty shocks (D89) |
| reliance on recursive VAR models (C32) | erroneous conclusions about effects of uncertainty on economic activity (D89) |