DP8432 Inference for VARs Identified with Sign Restrictions

Author(s): Eleonora Granziera, Mihye Lee, Hyungsik Roger Moon, Frank Schorfheide
Publication Date: June 2011
Keyword(s): Bayesian Inference, Frequentist Inference, Partially Identified Models, Sign Restrictions, Structural VARs
JEL(s): C1, C32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8432

There is a fast growing literature that partially identifies structural vector autoregressions (SVARs) by imposing sign restrictions on the responses of a subset of the endogenous variables to a particular structural shock (sign-restricted SVARs). To date, the methods that have been used are only justified from a Bayesian perspective. This paper develops methods of constructing error bands for impulse response functions of sign-restricted SVARs that are valid from a frequentist perspective. We also provide a comparison of frequentist and Bayesian error bands in the context of an empirical application--the former can be twice as wide as the latter.