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

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 SVARs identified with sign and zero restrictions and the answers have been positive and definite in both cases. While 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.

Critically Assessing Estimated DSGE Models: A Case Study of a Multi‐sector Model

“… Arias et al . () have another way of generating Q that preserves zero restrictions. Consequently, our choice may not exhaust the range of possible Q matrices and alternative models that might be generated, but that would only mean that our range is possibly smaller.…”

A Markov Switching Factor‐Augmented VAR Model for Analyzing US Business Cycles and Monetary Policy

“…Technical implementation is achieved by using the algorithm proposed in Arias, Rubio‐Ramirez and Waggoner () which collapses to the method stipulated in Rubio‐Ramirez et al . () in the absence of zero restrictions.…”

Time Series Econometrics

“…See Sect. 15.4.1) to follow a given sign pattern (Faust 1998;Uhlig 2005;Fry and Pagan 2011;Kilian and Murphy 2012;Rubio-Ramírez et al 2010;Arias et al 2014;Baumeister and Hamilton 2015). (iii) Maximization of the contribution to the forecast error variance of some variable at some horizon with respect to a particular shock (Faust 1998;Uhlig 2004;Francis et al 2014;Uhlig, 2003, What drives real GNP?…”

“…Arias et al (2014) show how sign and zero restrictions can be treated simultaneously. Arias et al (2014) show how sign and zero restrictions can be treated simultaneously.…”

“…Conditional on the estimated VAR, thus conditional on f b ‰ j g and b †, Lemma 15.1 suggests a simple and straightforward algorithm (see Rubio-Ramírez et al 2010;Arias et al 2014; for further details): Conditional on the estimated VAR, thus conditional on f b ‰ j g and b †, Lemma 15.1 suggests a simple and straightforward algorithm (see Rubio-Ramírez et al 2010;Arias et al 2014; for further details):…”