NCER Working Paper Series Some Issues in Using Sign Restrictions for Identifying Structural VARs

The paper looks at estimation of structural VARs with sign restrictions. Since sign restrictions do not generate a unique model it is necessary to find some way of summarizing the information they yield. Existing methods present impulse responses from different models and it is argued that they should come from a common model. If this is not done the implied shocks implicit in the impulse responses will not be orthogonal. A method is described that tries to resolve this difficulty. It works with a common model whose impulse responses are as close as possible to the median values of the impulse responses (taken over the range of models satisfying the sign restrictions). Using a simple demand and supply model it is shown that there is no reason to think that sign restrictions will generate better quantitative estimates of the effects of shocks than existing methods such as assuming a system is