The External-Instrument SVAR-IV (Proxy-SVAR) framework is extended to accommodate non-invertible and non-recoverable shocks, with formal tests provided for recoverability and invertibility. The approach allows the estimation of unitvariance shocks, absolute impulse responses, and variance decompositions for recoverable shocks, and it coincides with the standard method when shocks are invertible. Simulations demonstrate that it outperforms the Internal-Instrument approach due to greater flexibility. Application to a monetary policy VAR uncovers substantial effects of monetary policy on prices, differing from previous findings.
Forni, Mario, Luca, Gambetti e Giovanni, Ricco. "External Instrument SVAR Analysis for Noninvertible Shocks" Working paper, CENTRE FOR ECONOMIC POLICY RESEARCH DISCUSSION PAPERS, 2023.
External Instrument SVAR Analysis for Noninvertible Shocks
Mario Forni
;Luca Gambetti;
2023
Abstract
The External-Instrument SVAR-IV (Proxy-SVAR) framework is extended to accommodate non-invertible and non-recoverable shocks, with formal tests provided for recoverability and invertibility. The approach allows the estimation of unitvariance shocks, absolute impulse responses, and variance decompositions for recoverable shocks, and it coincides with the standard method when shocks are invertible. Simulations demonstrate that it outperforms the Internal-Instrument approach due to greater flexibility. Application to a monetary policy VAR uncovers substantial effects of monetary policy on prices, differing from previous findings.
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