Underidentified SVAR Models: A Framework for Combining Short and Long-Run Restrictions with Sign-Restrictions

We show that exchange rate pass-through to consumer prices varies not only across countries, but also over time. Previous literature has highlighted the role of an economy's 'structure' -such as its inflation volatility, inflation rate, use of foreign currency invoicing, and openness -in explaining these variations in pass-through. We use a sample of 26 advanced and emerging economies to show which of these structural variables are significant in explaining not only differences in pass-through across countries, but also over time. The 'shocks' leading to exchange rate movements can also explain variations in pass-through over time. For example, exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher estimates of pass-through than those caused by demand shocks. The role of 'shocks' in driving pass-through over time can be as large as that of structural variables, and even larger for some countries. As a result, forecasts predicting how a given exchange rate movement will impact inflation at a specific point in time should take into account not just an economy's 'structure', but also the 'shocks'.

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“…Finally, we impose this identification using an algorithm based on Rubio-Ramirez et al (2010) and Binning (2013) …”

Section: A the Svar Methodologymentioning

confidence: 99%

Shocks versus Structure: Explaining Differences in Exchange Rate Pass-Through across Countries and Time

2017

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“…15 Thus, we allow for two-way contemporaneous responses between stock prices, the policy rate, and both expectation measures, and by this we nest all alternative calibrations of the contemporaneous response of monetary policy to stock prices shocks of Galí & Gambetti (2015). Work by Arias et al (2014) and Binning (2013) allows us to combine sign restrictions with zero impact and long-run restrictions. Our identifying assumptions on the impact responses of the variables in the VAR to four identified shocks are summarized in Table 1.…”

Section: Identification Via Sign Restrictionsmentioning

confidence: 99%

“…Thus, in our identification scheme, we allow for two-way contemporaneous responses between stock prices and the policy rate. We implement this by imposing both zero impact and long-run restrictions following Bjørnland & Leitemo (2009) and by combining these with additional sign restrictions following Arias et al (2014) and Binning (2013). Similar to Galí & Gambetti (2015), we evaluate the response of the mispricing component in asset prices to monetary policy shocks in a time-varying coefficient (TVC) VAR following Primiceri (2005).…”

Section: Introductionmentioning

confidence: 99%

Monetary Policy and Mispricing in Stock Markets

Beckers

Bernoth

2016

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper investigates whether central banks can attenuate excessive mispricing in stocks as suggested by the proponents of a "leaning against the wind" (LATW) monetary policy. For this, we decompose stock prices into a fundamental component, a risk premium, and a mispricing component. We argue that mispricing can arise for two reasons: (i) from false subjective expectations of investors about future fundamentals and equity premia; and (ii) from the inherent indeterminacy in asset pricing in line with rational bubbles. We show that the response of the excessive stock price component to a monetary policy shock is ambiguous in both the short-and long-run, and depends on the nature of the mispricing. Subsequently, we evaluate the scope for a LATW policy empirically by employing a time-varying coefficient VAR with a flexible identification scheme based on impact and long-run restrictions using data for the S&P500 index from 1962Q1 to 2014Q4. We find that a contractionary monetary policy shock in fact lowers stock prices beyond what is implied by the response of their underlying fundamentals. Terms of use: Documents in

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“…There is an existing literature that already does exactly that. For example, Caldara and Kamps (2012) and Binning (2013) shared some of our concerns, while adding others, about the PFA. In related and very original work, Giacomini and Kitawaga (2015) were also concerned with the choice of the priors densities in SVARs identified using sign and zero restrictions.…”

Section: Introductionmentioning

confidence: 97%

Inference Based on Structural Vector Autoregressions Identified With Sign and Zero Restrictions: Theory and Applications

2018

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In this paper, we develop algorithms to independently draw from a family of conjugate posterior distributions over the structural parameterization when sign and zero restrictions are used to identify structural vector autoregressions (SVARs). We call this family of conjugate posteriors normal‐generalized‐normal. Our algorithms draw from a conjugate uniform‐normal‐inverse‐Wishart posterior over the orthogonal reduced‐form parameterization and transform the draws into the structural parameterization; this transformation induces a normal‐generalized‐normal posterior over the structural parameterization. The uniform‐normal‐inverse‐Wishart posterior over the orthogonal reduced‐form parameterization has been prominent after the work of Uhlig (2005). We use Beaudry, Nam, and Wang's (2011) work on the relevance of optimism shocks to show the dangers of using alternative approaches to implementing sign and zero restrictions to identify SVARs like the penalty function approach. In particular, we analytically show that the penalty function approach adds restrictions to the ones described in the identification scheme.

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Underidentified SVAR Models: A Framework for Combining Short and Long-Run Restrictions with Sign-Restrictions

Cited by 48 publications

References 19 publications

Shocks versus Structure: Explaining Differences in Exchange Rate Pass-Through across Countries and Time

Shocks versus Structure: Explaining Differences in Exchange Rate Pass-Through across Countries and Time

Monetary Policy and Mispricing in Stock Markets

Inference Based on Structural Vector Autoregressions Identified With Sign and Zero Restrictions: Theory and Applications

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