Estimating the impact of the volatility of shocks: a structural VAR approach

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 27 October 2011

Working Paper No. 437
By Haroon MumtazĀ 

A large empirical literature has examined the transmission mechanism of structural shocks in great detail. The possible role played by changes in the volatility of shocks has largely been overlooked in vector autoregression based applications. This paper proposes an extended vector autoregression where the volatility of structural shocks is allowed to be time-varying and to have a direct impact on the endogenous variables included in the model. The proposed model is applied to US data to consider the potential impact of changes in the volatility of monetary policy shocks. The results suggest that while an increase in this volatility has a statistically significant impact on GDP growth and inflation, the relative contribution of these shocks to the forecast error variance of these variables is estimated to be small.

PDFEstimating the impact of the volatility of shocks: a structural VAR approach

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