Data and Code for: What Can We Learn From Sign-Restricted VARs?

I use a simple business-cycle model to illustrate the workings and limitations of sign restrictions in Structural Vector Autoregressions. Three lessons emerge. First, such sign-based identification is vulnerable to ``shock masquerading'': linear combinations of other shocks may be mis-identified as the shock of interest. Second, since the popular Haar prior automatically over-weights more volatile shocks, the implied posterior is decisively shaped by relative shock volatilities – a feature of shocks that has nothing to do with their dynamic causal effects. Third, sign restrictions on structural elasticities – rather than just the usual restrictions on impulse responses – can be highly informative.