Identification in Structural Vector Autoregressive Models with Structural Changes, with an Application to US Monetary Policy

19 Pages Posted: 27 Oct 2015

See all articles by Emanuele Bacchiocchi

Emanuele Bacchiocchi

Università degli Studi di Milano

Luca Fanelli

Universita di Bologna

Date Written: December 2015

Abstract

A growing line of research makes use of structural changes and different volatility regimes found in the data in a constructive manner to improve the identification of structural parameters in structural vector autoregressions (SVARs). A standard assumption made in the literature is that the reduced form unconditional error covariance matrix varies while the structural parameters remain constant. Under this hypothesis, it is possible to identify the SVAR without needing to resort to additional restrictions. With macroeconomic data, the assumption that the transmission mechanism of the shocks does not vary across volatility regimes is debatable. We derive novel necessary and sufficient rank conditions for local identification of SVARs, where both the error covariance matrix and the structural parameters are allowed to change across volatility regimes. Our approach generalizes the existing literature on ‘identification through changes in volatility’ to a broader framework and opens up interesting possibilities for practitioners. An empirical illustration focuses on a small monetary policy SVAR of the US economy and suggests that monetary policy has become more effective at stabilizing the economy since the 1980s.

Suggested Citation

Bacchiocchi, Emanuele and Fanelli, Luca, Identification in Structural Vector Autoregressive Models with Structural Changes, with an Application to US Monetary Policy (December 2015). Oxford Bulletin of Economics and Statistics, Vol. 77, Issue 6, pp. 761-779, 2015, Available at SSRN: https://ssrn.com/abstract=2680429 or http://dx.doi.org/10.1111/obes.12092

Emanuele Bacchiocchi (Contact Author)

Università degli Studi di Milano ( email )

Milan, 20122
Italy

Luca Fanelli

Universita di Bologna ( email )

Bologna, 40126
Italy

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