Evaluating Structural Vector Autoregression Models in Monetary Economies (Job Market Paper)

This paper uses Monte Carlo simulations to evaluate alternative identi\u85cation strategies in VAR estimation of monetary models, and to assess the accuracy of measuring money instability as a cause of output uctuations. I construct theoretical monetary economies using general equilibrium models with cash-in-advance constraints, which also include technology shocks, la-bor supply shocks, and monetary shocks. Particularly, two economies are characterized: one is fully identi\u85ed and satis\u85es the long-run restriction; another is not fully identi\u85ed and the por-tion of temporary technology shocks is mixed with demand shocks when applying the long-run restriction. Based on each theoretical model, arti\u85cial economies are then generated through Monte Carlo simulations, which allow me to investigate the reliability of structural VAR esti-mation under various identifying restrictions. Applying short-run, medium-run, and long-run restrictions on the simulated data, I check for the bias between the average VAR estimates and the true theoretical claim. The \u85ndings show that short-run and medium-run restrictions tend to work more robustly under model uncertainty, particularly because the bias for measuring the e¤ects of monetary shocks using long-run restriction could increase substantially when the un-derlying economy includes unidenti\u85ed temporary shocks. This experiment supports the claim that monetary shocks contribute no more than one third of the cyclical variance of post-war U.S. output, and suggests that their contribution could in fact be substantially less