Working Paper: NBER ID: w12575
Authors: Patrick J. Kehoe
Abstract: The common approach to evaluating a model in the structural VAR literature is to compare the impulse responses from structural VARs run on the data to the theoretical impulse responses from the model. The Sims-Cogley-Nason approach instead compares the structural VARs run on the data to identical structural VARs run on data from the model of the same length as the actual data. Chari, Kehoe, and McGrattan (2006) argue that the inappropriate comparison made by the common approach is the root of the problems in the SVAR literature. In practice, the problems can be solved simply. Switching from the common approach to the Sims-Cogley-Nason approach basically involves changing a few lines of computer code and a few lines of text. This switch will vastly increase the value of the structural VAR literature for economic theory.
Keywords: Structural VARs; Sims-Cogley-Nason Approach; Impulse Responses; Economic Theory
JEL Codes: C32; C51; C52; E13; E17; E21; E27; E32; E37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| common approach (B50) | significant errors (C20) |
| common approach (B50) | biases (D91) |
| SCN approach (C45) | reliable results (C90) |
| switching to SCN approach (C24) | enhance utility of SVAR literature (C32) |
| common approach (B50) | fails to distinguish between competing models (C52) |
| technology shocks do not dominate output fluctuations (E39) | common approach fails to distinguish between models (C52) |
| SCN approach (C45) | avoid pitfalls of common approach (B53) |