Can Long-Run Restrictions Identify Technology Shocks?

By C. Erceg, Luca Guerrieri, Christopher J. Gust. 2005

246 citations recorded by the source corpus.

Gali's innovative approach of imposing long-run restrictions on a vector autoregression (VAR) to identify the effects of a technology shock has become widely utilized. In this paper, we inves-tigate its reliability through Monte Carlo simulations using calibrated business cycle models. Overall, Gali's methodology appears to be fruitful: the impulse responses derived from the artificial data generally have the same sign and qualitative pattern as the true responses, and the approach can be informative in discriminating between alternative models. However, our results reveal some important quantitative shortcomings, including considerable estimation uncertainty about the impact of technology shocks on macroeconomic variables. More gen-erally, the conditions under which the methodology performs well appear considerably more restrictive than implied by the key identifying assumption. This underscores the importance of using economic models to guide in the implementation of the approach, in interpreting the results, and in assessing its limitations. (JEL: C32, E32, O33) Copyright (c) 2005 by the European Economic Association.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/6085af3787514b9d7887baad781d0a2656ef996c

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Citations in the corpus

Trend Breaks, Long-Run Restrictions, and Contractionary Technology Improvements: Appendix (2007, background): “A third is Monte Carlo simulations of specific economic models (e.g, Erceg, Guerrieri, and Gust, 2005).”
Macroeconomic Shocks and Their Propagation (2016, methodology): “Faust (1998) and Uhlig (1997, 2005) developed a new method to incorporate “reasonableness” without undercutting scientific inquiry by investigating the effects of a shock on variable Y, where the shock was identified by sign restrictions on the responses of other variables (excluding variableY). Wor”
The Dynamic Effects of Neutral and Investment‐Specific Technology Shocks (2006, background): “Cooley and Dwyer (1998), Erceg, Guerriera, and Gust (2004), and most recently Christiano et al. (2006) discuss situations in which long-run restrictions might yield misleading results.”
Redistributive shocks and productivity shocks (2010, background): “…variable specification; Francis and Ramey (2005) and Uhlig (2004) for alternative identification strategies; and Chari, Kehoe, and McGrattan (2008), Erceg, Guerrieri, and Gust (2005), and Gaĺı and Rabanal (2005) regarding misspecification. the overshooting response of labor share to productivity…”
The shocks matter: Improving our estimates of exchange rate pass-through (2018, unknown): “(2014) and is similar to the SIGMA model developed by Erceg et al. (2006).”