Econometrics and Finance Seminar: Christiane Baumeister

Inference in Structural Vector Autoregressions When the Identifying Assumptions are Not Fully Believed: Re-evaluating the Role of Monetary Policy in Economic Fluctuations

Christiane BAUMEISTER, University of Notre Dame, USA

We demonstrate that formal Bayesian analysis of structural vector autoregressions offers clear guidance for inference about impulse-response functions and historical decompositions even if the model is not identified in the classical sense. Bayesian posterior probabilities describe uncertainty coming not just from randomness in the data but also uncertainty about the model itself. We illustrate these methods with a three-variable macroeconomic model and conclude that monetary policy shocks were not the major driver of output, inflation, or interest rates during the Great Moderation.