(Almost) Recursive Shock Identification with Economic Parameter Restrictions

30 Pages Posted: 10 Jan 2023 Last revised: 4 Oct 2023

See all articles by Jan Pablo Burgard

Jan Pablo Burgard

University of Trier - Faculty of Economics

Matthias Neuenkirch

University of Trier - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Dennis Umlandt

University of Innsbruck - Department of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 4, 2023

Abstract

We propose to estimate the parameters of a vector autoregressive model under the restriction that economic theory is not violated, while the shocks are still recursively identified. We use an augmented Lagrange solution approach, which adjusts the coefficients to meet the theoretical requirements. In a generalization, we additionally allow for a (minimal) rotation of the Cholesky matrix. Based on a Monte Carlo study and an empirical application, we show that the “almost recursive identification with parameter restrictions” leads to a solution that avoids an estimation bias, generates theory-consistent impulse responses, and is as close as possible to the recursive scheme.

Keywords: Non-Linear Optimization, Recursive Identification, Rotation, Sign Restrictions

JEL Classification: C32, C61, C82

Suggested Citation

Burgard, Jan Pablo and Neuenkirch, Matthias and Umlandt, Dennis, (Almost) Recursive Shock Identification with Economic Parameter Restrictions (October 4, 2023). Available at SSRN: https://ssrn.com/abstract=4320865 or http://dx.doi.org/10.2139/ssrn.4320865

Jan Pablo Burgard

University of Trier - Faculty of Economics ( email )

Germany

Matthias Neuenkirch (Contact Author)

University of Trier - Faculty of Economics ( email )

Universitätsring 15
Trier, 54296
Germany
+49 - (0)651 - 201 - 2629 (Phone)

HOME PAGE: http://www.uni-trier.de/index.php?id=50130

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Dennis Umlandt

University of Innsbruck - Department of Banking and Finance ( email )

Innsbruck
Austria

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