Can Long-Run Restrictions Identify Technology Shocks?

56 Pages Posted: 17 Feb 2004  

Christopher J. Erceg

Federal Reserve Board - Trade and Quantitative Studies

Luca Guerrieri

Federal Reserve Board - Trade and Financial Studies

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies

Date Written: January 2004

Abstract

Galí's innovative approach of imposing long-run restrictions on a vector autoregression (VAR) to identify the effects of a technology shock has become widely utilized. In this paper, we investigate its reliability through Monte Carlo simulations using calibrated business cycle models. We find it encouraging that the impulse responses derived from applying the Galí methodology to the artificial data generally have the same sign and qualitative pattern as the true responses. However, we find considerable estimation uncertainty about the quantitative impact of a technology shock on macroeconomic variables, and little precision in estimating the contribution of technology shocks to business cycle fluctuations. More generally, our analysis emphasizes that the conditions under which the methodology performs well appear considerably more restrictive than implied by the key identifying assumption, and depend on model structure, the nature of the underlying shocks, and variable selection in the VAR. This cautions against interpreting responses derived from this approach as model-independent stylized facts.

Keywords: Technology shocks, vector autoregressions, real business cycle models

JEL Classification: E32, C15, C52

Suggested Citation

Erceg, Christopher J. and Guerrieri, Luca and Gust, Christopher J., Can Long-Run Restrictions Identify Technology Shocks? (January 2004). Board of the Governors of the Federal Reserve International Finance Discussion Paper. Available at SSRN: https://ssrn.com/abstract=502624 or http://dx.doi.org/10.2139/ssrn.502624

Christopher J. Erceg

Federal Reserve Board - Trade and Quantitative Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2575 (Phone)
202-736-5638 (Fax)

Luca Guerrieri (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2550 (Phone)

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Paper statistics

Downloads
125
Rank
185,629
Abstract Views
993