Estimating the Impact of the Volatility of Shocks: A Structural VAR Approach

24 Pages Posted: 1 Nov 2011

See all articles by Haroon Mumtaz

Haroon Mumtaz

University of London - School of Sciences

Date Written: October 31, 2011

Abstract

A large empirical literature has examined the transmission mechanism of structural shocks in great detail. The possible role played by changes in the volatility of shocks has largely been overlooked in vector autoregression based applications. This paper proposes an extended vector autoregression where the volatility of structural shocks is allowed to be time-varying and to have a direct impact on the endogenous variables included in the model. The proposed model is applied to US data to consider the potential impact of changes in the volatility of monetary policy shocks. The results suggest that while an increase in this volatility has a statistically significant impact on GDP growth and inflation, the relative contribution of these shocks to the forecast error variance of these variables is estimated to be small.

Keywords: Vector autoregression, stochastic volatility, particle filter

JEL Classification: E30, E32

Suggested Citation

Mumtaz, Haroon, Estimating the Impact of the Volatility of Shocks: A Structural VAR Approach (October 31, 2011). Bank of England Working Paper No. 437. Available at SSRN: https://ssrn.com/abstract=1951934 or http://dx.doi.org/10.2139/ssrn.1951934

Haroon Mumtaz (Contact Author)

University of London - School of Sciences ( email )

London, WC1E 7HX
United Kingdom

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