Structural VARs and VECMs

Abstract

In Chapters 2 and 6, we have seen that, on the one hand, impulse responses are an important tool to uncover the relations between the variables in a VAR or VECM and, on the other hand, there are some obstacles in their interpretation. In particular, impulse responses are generally not unique and it is often not clear which set of impulse responses actually reflects the ongoings in a given system. Because the different sets of impulses can be computed from the same underlying VAR or VECM, it is clear that nonsample information has to be used to decide on the proper set for a particular given model. In econometric terminology, VARs are reduced form models and structural restrictions are required to identify the relevant innovations and impulse responses. In this chapter, different possible restrictions that have been proposed in the literature will be considered.