Search Results
Working Paper
Uniform Priors for Impulse Responses
There has been a call for caution when using the conventional method for Bayesian inference in set-identified structural vector autoregressions on the grounds that the uniform prior over the set of orthogonal matrices could be nonuniform for key objects of interest. This paper challenges this call. Although the prior distributions of individual impulse responses induced by the conventional method may be nonuniform, they typically do not drive the posteriors if one does not condition on the reduced-form parameters. Importantly, when the focus is on joint inference, the uniform prior over the ...
Working Paper
Asymmetric expectation effects of regime shifts in monetary policy
This paper addresses two substantive issues: (1) Does the magnitude of the expectation effect of regime switching in monetary policy depend on a particular policy regime? (2) Under which regime is the expectation effect quantitatively important? Using two canonical DSGE models, we show that there exists asymmetry in the expectation effect across regimes. The expectation effect under the dovish policy regime is quantitatively more important than that under the hawkish regime. These results suggest that the possibility of regime shifts in monetary policy can have important effects on rational ...
Working Paper
The Transmission of Financial Shocks and Leverage of Financial Institutions: An Endogenous Regime-Switching Framework
We conduct a novel empirical analysis of the role of leverage of financial institutions for the transmission of financial shocks to the macroeconomy. For that purpose, we develop an endogenous regime-switching structural vector autoregressive model with time-varying transition probabilities that depend on the state of the economy. We propose new identification techniques for regime switching models.Recently developed theoretical models emphasize the role of bank balance sheets for the build-up of financial instabilities and the amplification of financial shocks. We build a market-based ...
Working Paper
Closing the question on the continuation of turn-of-the-month effects: evidence from the S&P 500 Index futures contract
Prior research documents unusually high returns on the last trading day of the month and over the next three consecutive trading days. This phenomenon is known as the turn-of-the-month (TOTM) effect. According to Siegel (1998), why these anomalies occur is not well understood, and whether they will continue to be significant in the future is an open question. In this paper, we examine the S&P 500 futures contract for evidence that turn-of-the-month effects have continued. Transaction costs are low for index futures, and the absence of short-sale restrictions makes index futures an attractive ...
Working Paper
Conditional forecasts in dynamic multivariate models
In the existing literature, conditional forecasts in the vector autoregressive (VAR) framework have not been commonly presented with probability distributions or error bands. This paper develops Bayesian methods for computing such distributions or bands. It broadens the class of conditional forecasts to which the methods can be applied. The methods work for both structural and reduced-form VAR models and, in contrast to common practices, account for the parameter uncertainty in small samples. Empirical examples under the flat prior and under the reference prior of Sims and Zha (1998) are ...
Working Paper
A Gibbs simulator for restricted VAR models
Many economic applications call for simultaneous equations VAR modeling. We show that the existing importance sampler can be prohibitively inefficient for this type of models. We develop a Gibbs simulator that works for both simultaneous and recursive VAR models with a much broader range of linear restrictions than those in the existing literature. We show that the required computation is of an SUR type, and thus our method can be implemented cheaply even for large systems of multiple equations.
Working Paper
Likelihood-preserving normalization in multiple equation models
Causal analysis in multiple equation models often revolves around the evaluation of the effects of an exogenous shift in a structural equation. When taking into account the uncertainty implied by the shape of the likelihood, we argue that how normalization is implemented matters for inferential conclusions around the maximum likelihood (ML) estimates of such effects. We develop a general method that eliminates the distortion of finite-sample inferences about these ML estimates after normalization. We show that our likelihood-preserving normalization always maintains coherent economic ...
Working Paper
Markov-switching structural vector autoregressions: theory and application
This paper develops a new and easily implementable necessary and sufficient condition for the exact identification of a Markov-switching structural vector autoregression (SVAR) model. The theorem applies to models with both linear and some nonlinear restrictions on the structural parameters. We also derive efficient MCMC algorithms to implement sign and long-run restrictions in Markov-switching SVARs. Using our methods, four well-known identification schemes are used to study whether monetary policy has changed in the euro area since the introduction of the European Monetary Union. We find ...
Working Paper
Minimal state variable solutions to Markov-switching rational expectations models
We develop a new method for computing minimal state variable solutions (MSV) to Markov-switching rational expectations models. We provide an algorithm to compute an MSV solution and show how to test a given solution for uniqueness and boundedness. We construct an example that is calibrated to U.S. data and show that the MSV solution in our example is unique. This solution can potentially explain in three different ways the observed reduction in the variance of inflation and the interest rate after 1980: The policy rule might have changed, the variance of the fundamental shocks might have ...
Working Paper
Generalizing the Taylor principle: comment
Davig and Leeper (2007) have proposed a condition they call the generalized Taylor principle to rule out indeterminate equilibria in a version of the New Keynesian model, where the parameters of the policy rule follow a Markov-switching process. We show that although their condition rules out a subset of indeterminate equilibria, it does not establish uniqueness of the fundamental equilibrium. We discuss the differences between indeterminate fundamental equilibria included by Davig and Leeper's condition and fundamental equilibria that their condition misses.