Higher-order Moment Inequality Restrictions for SVARs Higher-order Moment Inequality Restrictions for SVARs

By Philippe Andrade, Filippo Ferroni, and Leonardo Melosi

Macroeconomic and financial fluctuations are often characterized by large shocks that have adverse macroeconomic consequences. This paper proposes to exploit this feature of the data to identify the effects of unobserved structural shocks. It introduces a new method that complements the second-order moment restrictions that are popular in the structural vector autoregression (SVAR) literature with higher-order moment properties of those shocks. More specifically, the method requires that large structural shocks occur relatively frequently so that their distribution is fat-tailed, and/or it requires that these large shocks lead more frequently to negative macroeconomic outcomes so that their distribution is skewed. The authors apply this identification method to three empirical issues: the effect of monetary policy on output and inflation, the macroeconomic impact of sovereign risk shocks in the euro area, and the impact of geopolitical risk on the US economy.

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