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What Can We Learn from Sign-Restricted VARs?

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  • Christian K. Wolf

Abstract

I use a simple business cycle model to illustrate the workings and limitations of sign restrictions in structural vector autoregressions. Three lessons emerge. First, such sign-based identification is vulnerable to "shock masquerading": linear combinations of other shocks may be misidentified as the shock of interest. Second, since the popular Haar prior automatically overweights more volatile shocks, the implied posterior is decisively shaped by relative shock volatilities—a feature of shocks that has nothing to do with their dynamic causal effects. Third, sign restrictions on structural elasticities—rather than just the usual restrictions on impulse responses—can be highly informative.

Suggested Citation

  • Christian K. Wolf, 2022. "What Can We Learn from Sign-Restricted VARs?," AEA Papers and Proceedings, American Economic Association, vol. 112, pages 471-475, May.
    • Handle: RePEc:aea:apandp:v:112:y:2022:p:471-75
    DOI: 10.1257/pandp.20221045
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    Citations

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    Cited by:

    1. Naraidoo, Ruthira & Paez-Farrell, Juan, 2023. "Commodity price shocks, labour market dynamics and monetary policy in small open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    2. Philippe Andrade & Filippo Ferroni & Leonardo Melosi, 2023. "Identification Using Higher-Order Moments Restrictions," Working Paper Series WP 2023-28, Federal Reserve Bank of Chicago.
    3. Ciccarelli, Matteo & Marotta, Fulvia, 2024. "Demand or Supply? An empirical exploration of the effects of climate change on the macroeconomy," Energy Economics, Elsevier, vol. 129(C).

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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