Identification of Economic Shocks by Inequality Constraints in Bayesian Structural Vector Autoregression

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Lanne , M & Luoto , J 2020 , ' Identification of Economic Shocks by Inequality Constraints in Bayesian Structural Vector Autoregression ' , Oxford Bulletin of Economics and Statistics , vol. 82 , no. 2 , pp. 425-452 . https://doi.org/10.1111/obes.12338

Title: Identification of Economic Shocks by Inequality Constraints in Bayesian Structural Vector Autoregression
Author: Lanne, Markku; Luoto, Jani
Contributor: University of Helsinki, Faculty of Social Sciences
University of Helsinki, HECER
Date: 2020-04
Language: eng
Number of pages: 28
Belongs to series: Oxford Bulletin of Economics and Statistics
ISSN: 0305-9049
URI: http://hdl.handle.net/10138/317213
Abstract: Theories often make predictions about the signs of the effects of economic shocks on observable variables, thus implying inequality constraints on the parameters of a structural vector autoregression (SVAR). We introduce a new Bayesian procedure to evaluate the probabilities of such constraints, and, hence, to validate the theoretically implied economic shocks. We first estimate a SVAR, where the shocks are identified by statistical properties of the data, and subsequently label these statistically identified shocks by the Bayes factors calculated from their probabilities of satisfying given inequality constraints. In contrast to the related sign restriction approach that also makes use of theoretically implied inequality constraints, no restrictions are imposed. Hence, it is possible that only a subset or none of the theoretically implied shocks can be labelled. In the latter case, we conclude that the data do not lend support to the theory implying the signs of the effects in question. We illustrate the method by empirical applications to the crude oil market, and U.S. monetary policy.
Subject: SIGN RESTRICTIONS
DISENTANGLING DEMAND
SUPPLY SHOCKS
OIL MARKET
511 Economics
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