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Discussion Paper Details

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Title: Idiosyncratic shocks: a new procedure for identifying shocks in a VAR with application to the New Keynesian model

Author(s): Michael R. Wickens

Publication Date: March 2019

Keyword(s): Macroeconomic Shocks, New Keynesian Model and VAR analysis

Programme Area(s): Monetary Economics and Fluctuations

Abstract: A key issue in VAR analysis is how best to identify economic shocks. The paper discusses the problems that the standard methods pose and proposes a new type of shock. Named an idiosyncratic shock, it is designed to identify the component in each VAR residual associated with the corresponding VAR variable. The procedure is applied to a calibrated New Keynesian model and to a VAR based on the same variables and using US data. The resulting impulse response functions are compared with those from standard procedures.

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Bibliographic Reference

Wickens, M. 2019. 'Idiosyncratic shocks: a new procedure for identifying shocks in a VAR with application to the New Keynesian model'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13613