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EconoQuantum

On-line version ISSN 2007-9869Print version ISSN 1870-6622

Abstract

KIM, Hyeongwoo. Generalized impulse response analysis: General or Extreme?. EconoQuantum [online]. 2013, vol.10, n.2, pp.136-141. ISSN 2007-9869.

This note discusses a pitfall of using the generalized impulse response function (GIRF) in vector autoregressive (VAR) models (Pesaran and Shin, 1998). The GIRF is general because it is invariant to the ordering of the variables in the VAR. The GIRF, in fact, is extreme because it yields a set of response functions that are based on extreme identifying assumptions that contradict each other, unless the covariance matrix is diagonal. With a help of empirical examples, the present note demonstrates that the GIRF may yield quite misleading economic inferences.

Keywords : Generalized Impulse Response Function; Orthogonalized Impulse Response Function; Vector Autoregressive Models.

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