A Back-of-the-Envelope Rule to Identify Atheoretical VARs

Authors

  • Carlos M. Urzúa Tecnológico de Monterrey, Campus Ciudad de México

DOI:

https://doi.org/10.12660/bre.v28n22008.1514

Abstract

Vector autoregressive models are often used in Macroeconomics to draw conclusions about the effects of policy innovations. However, those results depend on the researcher’s priors about the particular ordering of the variables. As an alternative, this paper presents a very simple rule based on the maximum entropy principle that can be used to find the “most likely” ordering. The proposal is illustrated in the case of a VAR model of the U.S. economy. It is found that monetary policy shocks are better represented by innovations in the federal funds rate rather than in non-borrowed reserves.

Published

2008-11-01

Issue

Section

Articles