Federal Reserve Bank of New York
Identifying shocks via time-varying volatility
An n-variable structural vector auto-regression (SVAR) can be identified (up to shock order) from the evolution of the residual covariance across time if the structural shocks exhibit heteroskedasticity (Rigobon (2003), Sentana and Fiorentini (2001)). However, the path of residual covariances can only be recovered from the data under specific parametric assumptions on the variance process. I propose a new identification argument that identifies the SVAR up to shock orderings using the autocovariance structure of second moments of the residuals, implied by an arbitrary stochastic process for the shock variances. These higher moments are available without parametric assumptions like those required by existing approaches. The conditions required for identification can be tested using a simple procedure. The identification scheme performs well in simulations. I apply the approach to the debate on fiscal multipliers and obtain estimates lower than those of Blanchard and Perotti (2002) and Mertens and Ravn (2014), but in line with more recent studies.
Cite this item
Daniel J. Lewis, Identifying shocks via time-varying volatility, Federal Reserve Bank of New York, Staff Reports 871, 01 Oct 2018, revised 01 May 2019.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
Keywords: identification; impulse response function; structural shocks; SVAR; fiscal multiplier; time-varying volatility; heteroskedasticity
This item with handle RePEc:fip:fednsr:871
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