Working Paper: NBER ID: w26606
Authors: Christiane Baumeister; James D. 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; Monetary Policy; Capital Flows
JEL Codes: C30; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Contractionary US monetary policy (E52) | Capital flows to emerging markets (F32) |
| Increase in US interest rates due to strengthening US economy (E43) | Capital flows diverted away from emerging markets to the US (F32) |
| Increase in US interest rates due to contractionary monetary policy without changes in economic fundamentals (E49) | Investors allocate more assets into US financial instruments (G15) |
| US monetary contraction increases fed funds futures rate while lowering US inflation and output growth (E31) | Identification of structural implications of SVARs (C32) |
| Sign restrictions alone (C29) | Misleading interpretations in causal inference (C32) |