A Flexible Finite-Horizon Alternative to Long-Run Restrictions with an Application to Technology Shocks

Francis, Neville; Owyang, Michael T.; Roush, Jennifer E.; DiCecio, Riccardo

doi:10.1162/rest_a_00406

Cited by 112 publications

(82 citation statements)

References 17 publications

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“…We focus on k equal to 20 quarters (5 years). Such a "medium run" identification approach has been shown to have considerably better small sample properties in some controlled settings (Francis et al, 2005).…”

Section: A Basic Methodsmentioning

confidence: 99%

Whither News Shocks?

Barsky¹,

Basu²,

Lee³

2014

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Does news about future productivity cause business-cycle fluctuations? What other effects might it have? We explore the answer to this question using semi-structural VARs, where "news" is defined as the innovation in the expectation of TFP at a fixed horizon in the future. We find that systems incorporating a number of forward-looking variables, including stock prices, consumption, consumer confidence and inflation, robustly predict three outcomes. First, following a news shock, TFP rises for several years. Second, inflation falls immediately and substantially, and stays low, often for 10 quarters or more. Third, there is a sharp increase in a forward-looking measure of consumer confidence. Consumption typically rises following good news, but investment, consumer durables purchases and hours worked typically fall on impact. All the quantity variables subsequently rise, as does TFP. Depending on the specification of the reduced form VAR, the activity variables may lead TFP to some extent -possibly lending some support to the hypothesis of news-driven business cycles -or they may move in lockstep with productivity. For the most part, the quantity and inflation responses are quite consistent with the predictions of a standard New Keynesian model augmented with real wage inertia.

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Section: A Basic Methodsmentioning

confidence: 99%

Whither News Shocks?

Barsky¹,

Basu²,

Lee³

2014

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“…Since minimizing the contribution of the restricted shock amounts to maximizing the share of the unrestricted one, in our bivariate model this is identical to the constraint brought forward by Francis et al (2013). While economic theory hardly gives any guidance regarding an appropriate value of h, one may instead have an interval of horizons in mind which will be considered relevant.…”

Section: Long-run and Finite-horizon Identification Schemesmentioning

confidence: 99%

“…As a remedy we suggest the use of medium-run constraints for identification, which was considered in standard SVARs by Uhlig (2004) and Francis et al (2013) as an alternative to long-run restrictions. We propose several approaches which constrain the variance contribution of selected shocks over a prespecified range of periods.…”

Section: Introductionmentioning

confidence: 99%

Long- versus medium-run identification in fractionally integrated VAR models

2014

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Abstract. We state that long-run restrictions that identify structural shocks in VAR models with unit roots lose their original interpretation if the fractional integration order of the affected variable is below one. For such fractionally integrated models we consider a medium-run approach that employs restrictions on variance contributions over finite horizons. We show for alternative identification schemes that letting the horizon tend to infinity is equivalent to imposing the restriction of Blanchard and Quah (1989) introduced for the unit-root case.JEL classification. C32, C50.

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“…7 Under the max share method, the impulse responses of all variables to a favorable shock to predictable changes in aggregate TFP are very similar to those to a favorable shock to predictable changes in investment-sector TFP. However, under Barsky and Sims' method, the results show the mixed effects of shocks to predictable changes in two sectoral TFP series.…”

mentioning

confidence: 90%

“…We employ two variants of the maximum forecast error variance approach (Uhlig, 2003) in a VAR system to isolate shocks that are associated with predictable movements in (aggregate and sectoral) TFP: the first is the max share method introduced by Francis et al (2005) and the second is the method proposed by Barsky and Sims (2011). Along with the restriction that such shocks have no immediate impact on TFP, the max share method identifies these shocks by maximizing their share of the forecast error variance (FEV) of TFP at a finite forecast horizon, while Barsky and Sims' method maximizes the sum of the shocks' shares of the FEV of TFP over all forecast horizons up to a finite truncation horizon.…”

Section: Introductionmentioning

confidence: 99%

Are predictable improvements in TFP contractionary or expansionary: Implications from sectoral TFP?

Nam¹,

Wang²

2014

Economics Letters

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We document in the US data: (1) The dominant predictable component of investment-sector TFP is its long-run movements, and a favorable shock to predictable changes in investmentsector TFP induces a broad economic boom that leads actual increases in investment-sector TFP by almost two years, and (2) predictable changes in consumption-sector TFP occur mainly at short forecast horizons, and a favorable shock to such predictable changes leads to immediate reductions in hours worked, investment, and output as well as an immediate rise in consumption-sector TFP. We argue that these documented differences in the responses to shocks to predictable sectoral TFP changes can reconcile the seemingly contradictory findings in Beaudry and Portier (2006) and Barsky and Sims (2011), whose analyses are based on aggregate TFP measures. In addition, we find that shocks to predictable changes in investment-sector TFP account for 50% of business cycle fluctuations in consumption, hours, investment, and output, while shocks to predictable changes in consumption-sector TFP explain only a small fraction of business cycle fluctuations of these aggregate variables.

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A Flexible Finite-Horizon Alternative to Long-Run Restrictions with an Application to Technology Shocks

Cited by 112 publications

References 17 publications

Whither News Shocks?

Whither News Shocks?

Long- versus medium-run identification in fractionally integrated VAR models

Are predictable improvements in TFP contractionary or expansionary: Implications from sectoral TFP?

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