DP11517 Narrative Sign Restrictions for SVARs

Author(s): Juan Antolin-Diaz, Juan Francisco Rubio-Ramírez
Publication Date: September 2016
Keyword(s): Bayesian Approach, monetary policy, Narrative Information, oil market, sign restrictions, SVARs
JEL(s): C32, E52
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11517

This paper identifies structural vector autoregressions using narrative sign restrictions. Narrative sign restrictions constrain the structural shocks and the historical decomposition of the data around key historical events, ensuring that they agree with the established account of these episodes. Using models of the oil market and monetary policy, we show that narrative sign restrictions can be highly informative. In particular we highlight that adding a small number of narrative sign restrictions, or sometimes even a single one, dramatically sharpens and even changes the inference of SVARs originally identified via the established practice of placing sign restrictions only on the impulse response functions. We see our approach as combining the appeal of narrative methods with the desire for basing inference on a few uncontroversial restrictions that popularized the use of sign restrictions.