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ESSEC Working Papers,
ESSEC Research Center, ESSEC Business School

No WP1702: Robust inference in structural VARs with long-run restrictions

Guillaume Chevillon (), Sophocles Mavroeidis () and Zhaoguo Zhan
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Guillaume Chevillon: ESSEC Research Center, ESSEC Business School, Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
Sophocles Mavroeidis: Department of Economics and Institute for New Economic Thinking at the Oxford Martin School, Oxford University, Postal: University of Oxford, Manor Road, Oxford, OX1 3UQ, United Kingdom
Zhaoguo Zhan: Department of Economics, Finance and Quantitative Analysis, Kennesaw State University, Postal: Kennesaw State University, GA 30144, United States,

Abstract: Long-run restrictions are a very popular method for identifying structural vector autoregressions, but they suffer from weak identification when the data is very persistent, i.e., when the highest autoregressive roots are near unity. Near unit roots introduce additional nuisance parameters and make standard weak-instrument-robust methods of inference inapplicable. We develop a method of inference that is robust to both weak identi fication and strong persistence. The method is based on a combination of the Anderson-Rubin test with instruments derived by fi ltering potentially non-stationary variables to make them near stationary. We apply our method to obtain robust con fidence bands on impulse responses in two leading applications in the literature.

Keywords: weak instruments; identification; SVARs; near unit roots; IVX

JEL-codes: C12; C32; E32

37 pages, November 22, 2016

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