External Instrument SVAR Analysis forNoninvertible Shocks

Mario Forni, Luca Gambetti and Giovanni Ricco ()

No 2023-03, Working Papers from Center for Research in Economics and Statistics

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.

Keywords: Proxy-SVAR; SVAR-IV; Impulse response functions; Variance Decomposition; Historical Decomposition; Monetary Policy Shock (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2023-01-29
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: External Instrument SVAR Analysis for Noninvertible Shocks (2023)
Working Paper: External Instrument SVAR Analysis for Noninvertible Shocks (2022)
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