DP13613 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|
|Date Revised:||March 2019|
|Keyword(s):||Macroeconomic Shocks, New Keynesian Model, VAR analysis|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13613|
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.