Narrative Sign Restrictions for SVARs

Juan Antolín-Díaz and Juan F. Rubio-Ramíez

Working Paper 2016-16
December 2016

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We identify structural vector autoregressions (SVARs) using narrative sign restrictions. Narrative sign restrictions constrain the structural shocks and the historical decomposition around key historical events, ensuring that they agree with the established narrative account of these episodes. Using models of the oil market and monetary policy, we show that narrative sign restrictions are highly informative. We highlight that adding a single narrative sign restriction dramatically sharpens and even changes the inference of SVARs originally identified via traditional sign restrictions. Our approach combines the appeal of narrative methods with the popularized usage of traditional sign restrictions.

JEL classification: C32, E52, Q35

Key words: narrative information, SVARs, Bayesian approach, sign restrictions, oil market, monetary policy


The authors are grateful to Gavyn Davies, Dan Waggonner, Lutz Kilian, Michele Lenza, Frank Schorfheide, Thomas Drechsel, and Ivan Petrella for helpful comments and suggestions. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Juan Antolín-Díaz, Fulcrum Asset Management, 66 Seymour Street, London W1H 5BT, United Kingdom, juan.antolin-diaz@fulcrumasset.com, or Juan F. Rubio-Ramírez (corresponding author), Economics Department, Emory University and Federal Reserve Bank of Atlanta, Rich Memorial Building, Room 306, Atlanta, GA 30322-2240, juan.rubio-ramirez@emory.edu.
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