Inference Based on SVARs Identified with Sign and Zero Restrictions: Theory and Applications

71 Pages Posted: 30 Mar 2015

See all articles by Jonas Arias

Jonas Arias

Federal Reserve Bank of Philadelphia

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Daniel F. Waggoner

Federal Reserve Bank of Atlanta

Date Written: February 2014

Abstract

Are optimism shocks an important source of business cycle fluctuations? Are deficit-financed tax cuts better than deficit-financed spending to increase output? These questions have been previously studied using structural vector autoregressions (SVAR) identified with sign and zero restrictions and the answers have been positive and definite in both cases. Although the identification of SVARs with sign and zero restrictions is theoretically attractive because it allows the researcher to remain agnostic with respect to the responses of the key variables of interest, we show that current implementation of these techniques does not respect the agnosticism of the theory. These algorithms impose additional sign restrictions on variables that are seemingly unrestricted that bias the results and produce misleading confidence intervals. We provide an alternative and efficient algorithm that does not introduce any additional sign restriction, hence preserving the agnosticism of the theory. Without the additional restrictions, it is hard to support the claim that either optimism shocks are an important source of business cycle fluctuations or deficit-financed tax cuts work best at improving output. Our algorithm is not only correct but also faster than current ones.

Keywords: identification, sign restrictions, simulation

JEL Classification: C11, C32, E50

Suggested Citation

Arias, Jonas and Rubio-Ramirez, Juan Francisco and Waggoner, Daniel F., Inference Based on SVARs Identified with Sign and Zero Restrictions: Theory and Applications (February 2014). FRB Atlanta Working Paper No. 2014-1, Available at SSRN: https://ssrn.com/abstract=2580264 or http://dx.doi.org/10.2139/ssrn.2580264

Jonas Arias

Federal Reserve Bank of Philadelphia ( email )

10 N Independence Mall W
Philadelphia, PA 19106
United States

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404-498-8057 (Phone)
404-498-8956 (Fax)

HOME PAGE: http://www.econ.umn.edu/~rubio

Daniel F. Waggoner (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-521-8278 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
247
Abstract Views
1,971
Rank
225,071
PlumX Metrics