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

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DOI

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.

Original languageEnglish
JournalOxford Bulletin of Economics and Statistics
Volume82
Issue2
Pages (from-to)425-452
Number of pages28
ISSN0305-9049
DOIs
Publication statusPublished - Apr 2020
Externally publishedYes

    Research areas

  • DISENTANGLING DEMAND, OIL MARKET, SIGN RESTRICTIONS, SUPPLY SHOCKS

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