Working Paper: CEPR ID: DP17886
Authors: Mario Forni; Luca Gambetti; Giovanni Ricco
Abstract: We propose a novel External-Instrument SVAR procedure, the Generalised External-Instrument SVAR, to identify and estimate the impulse response functions, regardless of the shock being invertible or recoverable. When the shock is recoverable, we also show how to estimate the unit variance shock and the ‘absolute’ response functions. When the shock is invertible, the method collapses to the standard External-Instrument SVAR procedure. We show how to test for recoverability and invertibility. We apply our techniques to a monetary policy VAR. It turns out that, using standard specifications, the monetary policy shock is not invertible, but is recoverable. When using our procedure, results are plausible even in a parsimonious specification, not including financial variables.Contrary to previous findings, monetary policy has significant and sizeable effects on prices.
Keywords: proxy SVAR; SVAR IV; impulse response functions; variance decomposition; historical decomposition; monetary policy shock
JEL Codes: C32; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy shocks (E39) | prices (P22) |
| monetary policy shocks (E39) | output (C67) |
| generalized external-instrument SVAR approach (C36) | impulse response functions (C22) |
| non-invertibility of shocks (C69) | misleading results (C52) |
| standard external-instrument SVAR method (C26) | misleading results (C52) |
| generalized external-instrument SVAR approach (C36) | reliable framework for analyzing monetary policy effects (E52) |