Lanne Lutkepohl JMCB 2008

These are replication files for Lanne and Lutkepohl(2008), which identifies a structural VAR using variance regimes. From the abstract:

"A central issue of monetary policy analysis is the specification of monetary policy shocks. In a structural vector autoregressive setting there has been some controversy about which restrictions to use for identifying the shocks because standard theories do not provide enough information to fully identify monetary policy shocks. In fact, to compare different theories it would even be desirable to have over-identifying restrictions which would make statistical tests of different theories possible. It is pointed out that some progress towards over-identifying monetary policy shocks can be made by using specific data properties. In particular, it is shown that changes in the volatility of the shocks can be used for identification. Based on monthly US data from 1965-1996 different theories are tested and it is found that associating monetary policy shocks with shocks to nonborrowed reserves leads to a particularly strong rejection of the model whereas assuming that the Fed accommodates demand shocks to total reserves cannot be rejected."

Note that RATS does not reproduce the published results as a a result of an error in the coding used in the paper (with regard to dating the break points). We were able to reproduce the published results by "replicating" the dating error.

The data are monthly from 1965 through 1996 and are the same data used in Bernanke and Mihov(1998). The model is divided into two subgroups of variables: policy variables (total reserves, non-borrowed reserves and the Federal Funds Rate) and non-policy variables (real GDP, GDP price deflator and commodities prices).

The authors use three variance regimes, only two of which use the structural model for the covariance matrix. The third (actually the first in order) is left to be freely estimated. It should be relatively easy to adapt to different numbers of variance regimes.

There are two proigrams:

LLHETERO.RPF

This estimates several SVAR's for isolating monetary policy shocks. Most of the calculations are done in a procedure called DoHSVAR which does the heteroscedasticity-identified VAR.

COVBREAKTEST.RPF

This does full VAR "Chow tests" for breaks in the covariance matrix for several proposed regime break locations.