Narrative Sign Restrictions for SVARs Antolín-Díaz, Juan; Rubio-Ramírez, Juan F.
The American economic review,
10/2018, Letnik:
108, Številka:
10
Journal Article
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We identify structural vector autoregressions using narrative sign restrictions. Narrative sign restrictions constrain the structural shocks and/or the historical decomposition around key historical ...events, ensuring that they agree with the established narrative account of these episodes. Using models of the oil market and monetary policy, we show that narrative sign restrictions tend to be highly informative. Even a single narrative sign restriction may dramatically sharpen and even change the inference of SVARs originally identified via traditional sign restrictions. Our approach combines the appeal of narrative methods with the popularized usage of traditional sign restrictions.
In this paper, we develop algorithms to independently draw from a family of conjugate posterior distributions over the structural parameterization when sign and zero restrictions are used to identify ...structural vector autoregressions (SVARs). We call this family of conjugate posteriors normal-generalized-normal. Our algorithms draw from a conjugate uniform-normal-inverse-Wishart posterior over the orthogonal reduced-form parameterization and transform the draws into the structural parameterization; this transformation induces a normal-generalized-normal posterior over the structural parameterization. The uniform-normal-inverse-Wishart posterior over the orthogonal reduced-form parameterization has been prominent after the work of Uhlig (2005). We use Beaudry, Nam, and Wang's (2011) work on the relevance of optimism shocks to show the dangers of using alternative approaches to implementing sign and zero restrictions to identify SVARs like the penalty function approach. In particular, we analytically show that the penalty function approach adds restrictions to the ones described in the identification scheme.
Structural vector autoregressions (SVARs) are widely used for policy analysis and to provide stylized facts for dynamic stochastic general equilibrium (DSGE) models; yet no workable rank conditions ...to ascertain whether an SVAR is globally identified have been established. Moreover, when nonlinear identifying restrictions are used, no efficient algorithms exist for small-sample estimation and inference. This paper makes four contributions towards filling these important gaps in the literature. First, we establish general rank conditions for global identification of both identified and exactly identified models. These rank conditions are sufficient for general identification and are necessary and sufficient for exact identification. Second, we show that these conditions can be easily implemented and that they apply to a wide class of identifying restrictions, including linear and certain nonlinear restrictions. Third, we show that the rank condition for exactly identified models amounts to a straightforward counting exercise. Fourth, we develop efficient algorithms for small-sample estimation and inference, especially for SVARs with nonlinear restrictions.
Risk Matters: The Real Effects of Volatility Shocks Fernández-Villaverde, Jesús; Guerrón-Quintana, Pablo; Rubio-Ramírez, Juan F. ...
The American economic review,
10/2011, Letnik:
101, Številka:
6
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We show how changes in the volatility of the real interest rate at which small open emerging economies borrow have an important effect on variables like output, consumption, investment, and hours. We ...start by documenting the strong evidence of time-varying volatility in the real interest rates faced by four emerging economies: Argentina, Brazil, Ecuador, and Venezuela. We estimate a stochastic volatility process for real interest rates. Then, we feed this process in a standard small open economy business cycle model. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, hours, and debt.
We construct, and then estimate by maximum likelihood, a tractable dynamic stochastic general equilibrium model with incomplete insurance and heterogenous agents. The key feature of our framework is ...that cross-sectional heterogeneity remains finite dimensional. The solution to the model thus admits a state- space representation that can be used to recover the distribution of the model's parameters. Household heterogeneity expands the set of observables to cross- sectional moments available at the business-cycle frequency (in addition to theusual macro and monetary time series). Incomplete insurance gives rise to a precautionary motive for holding wealth that propagates aggregate shocks via (i) a stabilizing aggregate supply effect, working through the supply of capital, and (ii) a destabilizing aggregate demand effect coming from the feedback loop between unemployment risk and precautionary saving. Using the estimated model to measure the contribution of precautionary savings to the propagation of recent recessions, we find strong aggregate demand effects during the Great Recession and, to a lesser extent, during the 1990-1991 recession. In contrast, the supply effect at least offsets the demand effect during the 2001 recession.
This article studies the pruned state-space system for higher-order perturbation approximations to dynamic stochastic general equilibrium (DSGE) models. We show the stability of the pruned ...approximation up to third order and provide closed-form expressions for first and second unconditional moments and impulse response functions. Our results introduce generalized method of moments (GMM) estimation and impulse-response matching for DSGE models approximated up to third order and provide a foundation for indirect inference and simulated method of moments (SMM). As an application, we consider a New Keynesian model with Epstein–Zin preferences and two novel feedback effects from long-term bonds to the real economy, allowing us to match the level and variability of the 10-year term premium in the U.S. with a low relative risk aversion of 5.
•We studies the effects of monetary policy shocks using structural VARs.•The innovation is that identification is achieved by sign and zero restrictions on the systematic part of monetary policy.•We ...do not restrict the contemporaneous response of output to a monetary policy shock.•We find that an increase in the federal funds rate induces a contraction in output.•We also find that monetary policy shocks are contractionary during the Great Moderation.
This paper studies the effects of monetary policy shocks using structural VARs. We achieve identification by imposing sign and zero restrictions on the systematic component of monetary policy. Importantly, our identification scheme does not restrict the contemporaneous response of output to a monetary policy shock. Using data for the period 1965–2007, we consistently find that an increase in the federal funds rate induces a contraction in output. We also find that monetary policy shocks are contractionary during the Great Moderation. Finally, we show that the identification strategy in Uhlig (2005), which imposes sign restrictions on the impulse response functions to a monetary policy shock, does not satisfy our restrictions on the systematic component of monetary policy with high posterior probability.
Structural scenario analysis with SVARs Antolín-Díaz, Juan; Petrella, Ivan; Rubio-Ramírez, Juan F.
Journal of monetary economics,
January 2021, 2021-01-00, Letnik:
117
Journal Article
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•This paper develops tools for constructing economically meaningful scenarios with structural VARs.•It also proposes a metric to assess and compare their plausibility.•We relate our method to ...entropic tilting.•We provide a unified treatment of conditional forecasting and structural scenario analysis.,•A careful treatment of uncertainty makes our methods suitable for density forecasting and risk assessment.•Two applications illustrate our methods: assessing interest-rate forward guidance and stress-testing bank profitability.
Macroeconomists constructing conditional forecasts often face a choice between taking a stand on the details of a fully-specified structural model or relying on correlations from VARs and remaining silent about underlying causal mechanisms. This paper develops tools for constructing economically meaningful scenarios with structural VARs, and proposes a metric to assess and compare their plausibility. We provide a unified treatment of conditional forecasting and structural scenario analysis, relating them to entropic tilting. A careful treatment of uncertainty makes our methods suitable for density forecasting and risk assessment. Two applications illustrate our methods: assessing interest-rate forward guidance and stress-testing bank profitability.
Nonlinear adventures at the zero lower bound Fernández-Villaverde, Jesús; Gordon, Grey; Guerrón-Quintana, Pablo ...
Journal of economic dynamics & control,
08/2015, Letnik:
57
Journal Article
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In this paper, we argue for the importance of explicitly considering nonlinearities in analyzing the behavior of the New Keynesian model with a zero lower bound (ZLB) of the nominal interest rate. To ...show this, we report how the decision rules and the equilibrium dynamics of the model are substantially affected by the nonlinear features brought about by the ZLB. We also illustrate a tension between the length of a spell at the ZLB and the drop in consumption there.
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