Narrative Restrictions and Proxies. Issue 4 (2nd October 2022)

• Record Type: Journal Article
• Authors: Giacomini, Raffaella; Kitagawa, Toru; Read, Matthew
• Is Part Of: Journal of business & economic statistics. Volume 40:Issue 4(2022)
• Page Start: 1415
• Page End: 1425
• Publication Date: 2022-10-02
• Subjects: Impulse-response analysis -- Prior sensitivity -- Sign restrictions -- Weak instruments; Economics -- Statistical methods -- Periodicals; Commercial statistics -- Periodicals; Économie politique -- Méthodes statistiques -- Périodiques; Statistique commerciale -- Périodiques; 330.015195
• DOI: 10.1080/07350015.2022.2115496
• Languages: English
• ISSNs: 0735-0015

Abstract

Abstract: We compare two approaches to using information about the signs of structural shocks at specific dates within a structural vector autoregression (SVAR): imposing "narrative restrictions" (NR) on the shock signs in an otherwise set-identified SVAR; and casting the information about the shock signs as a discrete-valued "narrative proxy" (NP) to point-identify the impulse responses. The NP is likely to be "weak" given that the sign of the shock is typically known in a small number of periods, in which case the weak-proxy robust confidence intervals in Montiel Olea, Stock, and Watson are the natural approach to conducting inference. However, we show both theoretically and via Monte Carlo simulations that these confidence intervals have distorted coverage—which may be higher or lower than the nominal level—unless the sign of the shock is known in a large number of periods. Regarding the NR approach, we show that the prior-robust Bayesian credible intervals from Giacomini, Kitagawa, and Read deliver coverage exceeding the nominal level, but which converges toward the nominal level as the number of NR increases.