Econometrics & Applied Economics Seminar - Ralf Brueggemann (University of Konstanz)

Room 315, Level 3, FBE Building, 111 Barry Street, Carlton

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Title: Identification of SVAR Models by Combining Sign Restrictions With External Instruments

Abstract: We discuss combining sign restrictions with information in external instruments (proxy variables) to identify structural vector autoregressive (SVAR) models. We distinguish two scenarios that are relevant for SVAR practitioners. In the first, we assume the availability of valid external instruments. Here, sign restrictions can be imposed to identify additional shocks, or to further disentangle the effects of shocks to be identified by external instruments. In the latter case, these restrictions eventually become overidentifying and can be checked against the data. In the second scenario, we assume the availability of proxy variables without assuming their exogeneity. We propose to use knowledge on the relation between proxy variables and the structural shocks to sharpen the results from set-identifying sign restrictions. We discuss Bayesian inference and the estimation of marginal likelihoods and Bayes factors, which allows us to check overidentifying restrictions. In empirical applications we illustrate the usefulness of our method estimating the effects of oil market and monetary policy shocks.