Identification Through Heterogeneity

102 Pages Posted: 2 May 2017

See all articles by Pooyan Amir-Ahmadi

Pooyan Amir-Ahmadi

University of Illinois at Urbana-Champaign - Department of Economics

Thorsten Drautzburg

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-05-01

Abstract

We analyze set identification in Bayesian vector autoregressions (VARs). Because set identification can be challenging, we propose to include micro data on heterogeneous entities to sharpen inference. First, we provide conditions when imposing a simple ranking of impulse-responses sharpens inference in bivariate and trivariate VARs. Importantly; we show that this set reduction also applies to variables not subject to ranking restrictions. Second, we develop two types of inference to address recent criticism: (1) an efficient fully Bayesian algorithm based on an agnostic prior that directly samples from the admissible set and (2) a prior-robust Bayesian algorithm to sample the posterior bounds of the identified set. Third, we apply our methodology to U.S. data to identify productivity news and defense spending shocks. We find that under both algorithms, the bounds of the identified sets shrink substantially under heterogeneity restrictions relative to standard sign restrictions.

Keywords: Structural VAR, set-identification, heterogeneity and sign restrictions, posterior bounds, Bayesian inference, sampling methods, productivity news, government spending.

Suggested Citation

Amir-Ahmadi, Pooyan and Drautzburg, Thorsten, Identification Through Heterogeneity (2017-05-01). FRB of Philadelphia Working Paper No. 17-11, Available at SSRN: https://ssrn.com/abstract=2961716

Pooyan Amir-Ahmadi (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

Thorsten Drautzburg

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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