Giacomini, Raffaella;
Kitagawa, Toru;
Read, Matthew;
(2022)
Narrative Restrictions and Proxies.
(FRB of Chicago Working Paper
).
Elsevier: Rochester, NY, USA.
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Abstract
We compare two approaches to using information about the signs of structural shocks at specific dates within a structural vector autoregression (SVAR): imposing ‘narrative restrictions’ (NR) on the shock signs in an otherwise set-identified SVAR; and casting the information about the shock signs as a discrete-valued ‘narrative proxy’ (NP) to point-identify the impulse responses. The NP is likely to be ‘weak’ given that the sign of the shock is typically known in a small number of periods, in which case the weak-proxy robust confidence intervals in Montiel-Olea et al. (2021) are the natural approach to conducting inference. However, we show both theoretically and via Monte Carlo simulations that these confidence intervals have distorted coverage — which may be higher or lower than the nominal level — unless the sign of the shock is known in a large number of periods. Regarding the NR approach, we show that the prior-robust Bayesian credible intervals from Giacomini et al. (2021a) deliver coverage exceeding the nominal level, but which converges towards the nominal level as the number of NR increases.
Type: | Working / discussion paper |
---|---|
Title: | Narrative Restrictions and Proxies |
Open access status: | An open access version is available from UCL Discovery |
DOI: | 10.2139/ssrn.4078221 |
Publisher version: | https://doi.org/10.21033/wp-2022-10 |
Language: | English |
Additional information: | This version is the version of record. For information on re-use, please refer to the publisher's terms and conditions. |
Keywords: | weak instruments, sign restrictions, impulse-response analysis, prior sensitivity |
UCL classification: | UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics UCL > Provost and Vice Provost Offices > UCL SLASH UCL |
URI: | https://discovery.ucl.ac.uk/id/eprint/10155909 |
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