Working Paper: NBER ID: w23225
Authors: Sydney C. Ludvigson; Sai Ma; Serena Ng
Abstract: It is well known that the covariance structure of the data alone is not enough to identify an SVAR, and the conventional approach is to impose restrictions on the parameters of the model based on a priori theoretical considerations. This paper suggests that much can be gained by requiring the properties of the identified shocks to agree with major economic events that have been realized. We first show that even without additional restrictions, the data alone are often quite informative about the quantitatively important shocks that have occurred in the sample. We propose shrinking the set of solutions by imposing two types of inequality constraints on the shocks. The first restricts the sign and possibly magnitude of the shocks during unusual episodes in history. The second restricts the correlation between the shocks and variables external to the SVAR. The methodology provides a way to assess the validity of assumptions imposed as equality constraints. The effectiveness and limitations of this approach are exemplified with three applications.
Keywords: SVAR; shock identification; inequality constraints; historical events
JEL Codes: C01; C5; C51; E17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| identified shocks (D80) | large spikes in oil prices (Q31) |
| oil supply shocks (Q43) | large spikes in oil prices (Q31) |
| identified structural shocks (e_prod_t) (E23) | economic events (G14) |
| monetary policy actions (E52) | economic responses (E65) |