The Power of Long-Run Structural VARs

38 Pages Posted: 30 Sep 2009

See all articles by Christopher Gust

Christopher Gust

Board of Governors of the Federal Reserve System

Robert J. Vigfusson

Board of Governors of the Federal Reserve System

Date Written: September 11, 2009

Abstract

Are structural vector autoregressions (VARs) useful for discriminating between macro models‘ Recent assessments of VARs have shown that these statistical methods have adequate size properties. In other words, in simulation exercises, VARs will only infrequently reject the true data generating process. However, in assessing a statistical test, we often also care about power: The ability of the test to reject a false hypothesis. Much less is known about the power of structural VARs.

This paper attempts to fill in this gap by exploring the power of long-run structural VARs against a set of DSGE models that vary in degree from the true data generating process. We report results for two tests: The standard test of checking the sign on impact and a test of the shape of the response. For the models studied here, testing the shape is a more powerful test than simply looking at the sign of the response. In addition, relative to an alternative statistical test based on sample correlations, we find that the shape-based tests have greater power. Given the results on the power and size properties of long-run VARs, we conclude that these VARs are useful for discriminating between macro models.

Keywords: Vector autoregression, dynamic stochastic general equilibrium model, confidence intervals, impulse responpd functions, identifications, long run restrictions, specification error, sampling

JEL Classification: C1

Suggested Citation

Gust, Christopher and Vigfusson, Robert John, The Power of Long-Run Structural VARs (September 11, 2009). FRB International Finance Discussion Paper No. 978, Available at SSRN: https://ssrn.com/abstract=1478656 or http://dx.doi.org/10.2139/ssrn.1478656

Christopher Gust (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Robert John Vigfusson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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