NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How to Advance Theory with Structural VARs: Use the Sims-Cogley-Nason Approach

Patrick J. Kehoe

NBER Working Paper No. 12575
Issued in October 2006
NBER Program(s):   IFM   ME   EFG

The common approach to evaluating a model in the structural VAR literature is to compare the impulse responses from structural VARs run on the data to the theoretical impulse responses from the model. The Sims-Cogley-Nason approach instead compares the structural VARs run on the data to identical structural VARs run on data from the model of the same length as the actual data. Chari, Kehoe, and McGrattan (2006) argue that the inappropriate comparison made by the common approach is the root of the problems in the SVAR literature. In practice, the problems can be solved simply. Switching from the common approach to the Sims-Cogley-Nason approach basically involves changing a few lines of computer code and a few lines of text. This switch will vastly increase the value of the structural VAR literature for economic theory.

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Document Object Identifier (DOI): 10.3386/w12575

Published: Assessing Structural VARs, Lawrence J. Christiano, Martin Eichenbaum, Robert Vigfusson. in NBER Macroeconomics Annual 2006, Volume 21, Acemoglu, Rogoff, and Woodford. 2007

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