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External Instrument SVAR Analysis forNoninvertible Shocks

Author

Listed:
  • Mario Forni

    (Università di Modena e Reggio Emilia, CEPR and RECent)

  • Luca Gambetti

    (Universitat Autònoma de Barcelona, BSE, Università di Torino, CCA)

  • Giovanni Ricco

    (École Polytechnique, University of Warwick, OFCE-SciencesPo, and CEPR)

Abstract

We propose a novel External-Instrument SVAR procedure, the Generalised External- Instrument SVAR, to identify and estimate the impulse response functions, regardless of the shock being invertible or recoverable. When the shock is recoverable, we also show how to estimate the unit variance shock and the ‘absolute’ response functions. When the shock is invertible, the method collapses to the standard External-Instrument SVAR procedure. We show how to test for recoverability and invertibility. We apply our techniques to a monetary policy VAR. It turns out that, using standard specifications, the monetary policy shock is not invertible, but is recoverable. When using our procedure, results are plausible even in a parsimonious specification, not including financial variables. Contrary to previous findings, monetary policy has significant and sizeable effects on prices.

Suggested Citation

  • Mario Forni & Luca Gambetti & Giovanni Ricco, 2023. "External Instrument SVAR Analysis forNoninvertible Shocks," Working Papers 2023-03, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2023-03
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    References listed on IDEAS

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    7. Forni, Mario & Gambetti, Luca, 2014. "Sufficient information in structural VARs," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 124-136.
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    Cited by:

    1. Miranda-Agrippino, Silvia & Ricco, Giovanni, 2021. "Bayesian Local Projections," The Warwick Economics Research Paper Series (TWERPS) 1348, University of Warwick, Department of Economics.
    2. Davide Brignone & Alessandro Franconi & Marco Mazzali, 2023. "Robust Impulse Responses using External Instruments: the Role of Information," Papers 2307.06145, arXiv.org.

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    More about this item

    Keywords

    Proxy-SVAR; SVAR-IV; Impulse response functions; Variance Decomposition; Historical Decomposition; Monetary Policy Shock;
    All these keywords.

    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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