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Identification of Small Open Economy SVARs via Markov‐Switching Heteroskedasticity
Author(s) -
Turnip Guido
Publication year - 2017
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/1475-4932.12345
Subject(s) - small open economy , economics , monetary policy , exchange rate , impulse response , heteroscedasticity , markov chain , shock (circulatory) , econometrics , vector autoregression , simultaneity , open economy , monetary economics , macroeconomics , mathematics , statistics , medicine , mathematical analysis , physics , classical mechanics
Various identifying restrictions commonly used in small open economy structural vector autoregression (SVAR) models are tested against an SVAR model identified via Markov‐switching heteroskedasticity. The SVARs are estimated for three small open economies, Australia, Canada and New Zealand. The most supported model is the one that allows for simultaneity between monetary policy and the real exchange rate without restricting the long‐run response of the real exchange rate to a monetary policy shock. The impulse responses to a monetary policy shock and an exchange rate shock identified from such model are consistent with theoretical predictions.