External Instrument SVAR Analysis for Noninvertible Shocks
- Aug 30, 2024
- 1 min read
Updated: Sep 30, 2024
We extend the SVAR-IV (Proxy-SVAR) method to handle noninvertible and nonrecoverable shocks, providing tests for recoverability and invertibility. Our approach allows the estimation of unit variance shocks, absolute response functions, and variance decomposition for recoverable shocks. When the shock is invertible, the method aligns with the standard approach. Using simulations, we show that our method outperforms the Internal-Instrument approach, due to its greater flexibility. Applying our method to a monetary policy VAR, we find sizeable effects of monetary policy on prices differently from previous findings.
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