Sign Restrictions in Bayesian Favars with an Application to Monetary Policy Shocks

96 Pages Posted: 23 Nov 2015 Last revised: 1 Dec 2015

See all articles by Pooyan Amir-Ahmadi

Pooyan Amir-Ahmadi

University of Illinois at Urbana-Champaign - Department of Economics

Harald Uhlig

University of Chicago - Department of Economics

Date Written: November 2015

Abstract

We propose a novel identification strategy of imposing sign restrictions directly on the impulse responses of a large set of variables in a Bayesian factor-augmented vector autoregression. We conceptualize and formalize conditions under which every additional sign restriction imposed can be qualified as either relevant or irrelevant for structural identification up to a limiting case of point identification. Deriving exact conditions we establish that, (i) in a two dimensional factor model only two out of potentially infinite sign restrictions are relevant and (ii) in contrast, in cases of higher dimension every additional sign restriction can be relevant improving structural identification. The latter result can render our approach a blessing in high dimensions. In an empirical application for the US economy we identify monetary policy shocks imposing conventional wisdom and find modest real effects avoiding various unreasonable responses specifically present and pronounced combining standard recursive identification with FAVARs.

Suggested Citation

Amir-Ahmadi, Pooyan and Uhlig, Harald, Sign Restrictions in Bayesian Favars with an Application to Monetary Policy Shocks (November 2015). NBER Working Paper No. w21738, Available at SSRN: https://ssrn.com/abstract=2694385

Pooyan Amir-Ahmadi (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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