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Macroeconomic responses to uncertainty shocks: The perils of recursive orderings

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  • Kilian, Lutz
  • Plante, Michael
  • Richter, Alexander W.

Abstract

A common practice in empirical macroeconomics is to examine alternative recursive orderings of the variables in structural vector autogressive (VAR) models. When the implied impulse responses look similar, the estimates are considered trustworthy. When they do not, the estimates are used to bound the true response without directly addressing the identification challenge. A leading example of this practice is the literature on the effects of uncertainty shocks on economic activity. We prove by counterexample that this practice is invalid in general, whether the data generating process is a structural VAR model or a dynamic stochastic general equilibrium model.

Suggested Citation

  • Kilian, Lutz & Plante, Michael & Richter, Alexander W., 2022. "Macroeconomic responses to uncertainty shocks: The perils of recursive orderings," CFS Working Paper Series 687, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:285367
    DOI: 10.2139/ssrn.4361693
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    References listed on IDEAS

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    1. Karen Kopecky & Richard Suen, 2010. "Finite State Markov-chain Approximations to Highly Persistent Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 701-714, July.
    2. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
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    Cited by:

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    4. Mariusz Kapuściński, 2024. "The short-term effects of changes in capital regulations in Poland," Bank i Kredyt, Narodowy Bank Polski, vol. 55(3), pages 255-286.

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    More about this item

    Keywords

    Cholesky decomposition; orthogonalization; simultaneity; endogeneity; uncertainty; business cycle;
    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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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