Narrative Restrictions and Proxies

31 Pages Posted: 8 Apr 2022

See all articles by Raffaella Giacomini

Raffaella Giacomini

University College London - Department of Economics; University of California, Los Angeles - Department of Economics

Toru Kitagawa

Brown University

Matthew Read

University College London - Department of Economics

Date Written: April 6, 2022

Abstract

We compare two approaches to using information about the signs of structural shocks at specific dates within a structural vector autoregression (SVAR): imposing ‘narrative restrictions’ (NR) on the shock signs in an otherwise set-identified SVAR; and casting the information about the shock signs as a discrete-valued ‘narrative proxy’ (NP) to point-identify the impulse responses. The NP is likely to be ‘weak’ given that the sign of the shock is typically known in a small number of periods, in which case the weak-proxy robust confidence intervals in Montiel-Olea et al. (2021) are the natural approach to conducting inference. However, we show both theoretically and via Monte Carlo simulations that these confidence intervals have distorted coverage — which may be higher or lower than the nominal level — unless the sign of the shock is known in a large number of periods. Regarding the NR approach, we show that the prior-robust Bayesian credible intervals from Giacomini et al. (2021a) deliver coverage exceeding the nominal level, but which converges towards the nominal level as the number of NR increases.

Keywords: weak instruments, sign restrictions, impulse-response analysis, prior sensitivity

JEL Classification: C11, C32, C36

Suggested Citation

Giacomini, Raffaella and Kitagawa, Toru and Read, Matthew, Narrative Restrictions and Proxies (April 6, 2022). FRB of Chicago Working Paper No. 2022-10, Available at SSRN: https://ssrn.com/abstract=4078221 or http://dx.doi.org/10.2139/ssrn.4078221

Raffaella Giacomini (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

University of California, Los Angeles - Department of Economics ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095-1361
United States

Toru Kitagawa

Brown University ( email )

Box 1860
Providence, RI 02912
United States

Matthew Read

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

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