Identifying structural VARs from sparse narrative instruments: Dynamic effects of US macroprudential policies

Abstract

Summary We study identification in Bayesian proxy VARs for instruments that consist of sparse qualitative observations indicating the signs of shocks in specific periods. We propose the Fisher discriminant regression and a non‐parametric sign concordance criterion as two alternative methods for achieving correct inference in this case. The former represents a minor deviation from a standard proxy VAR, whereas the non‐parametric approach builds on set identification. Our application to US macroprudential policies finds persistent declines in credit volumes and house prices together with moderate declines in GDP and inflation and a widening of corporate bond spreads after a tightening of capital requirements or mortgage underwriting standards.

Macroprudential Capital Regulation and Fiscal Balances in the Euro Area

“…2 1 The business cycle channel of macroprudential policy has been extensively investigated in the literature -see e.g. Galati and Moessner (2018) and Budnik and Ruenstler (2022). Regarding the financial crisis channel, constructing a solid empirical exercise is difficult given the small number of financial crises in the euro area over the past years and the corresponding difficulties in measuring their likelihood.…”

“…For instance,Mendicino et al (2020) show in a calibrated model for the euro area that the policy rate declines after a restrictive shock to macroprudential capital regulation. For the US,Budnik and Ruenstler (2022) find that the federal fund rate also decreases in response to a tightening of capital requirements. Moreover,Eickmeier et al (2018) conclude for the US that,…”