Helmut Luetkepohl, Aleksei Netsunajev

Structural Vector Autoregressions with Heteroskedasticity: A Comparison of Different Volatility Models

Published in: Econometrics and Statistics (2017)

A growing literature uses changes in residual volatility for identifying structural shocks in vector autoregressive (VAR) analysis. A number of different models for heteroskedasticity or conditional heteroskedasticity are proposed and used in applications in this context. This study reviews the different volatility models and points out their advantages and drawbacks. It thereby enables researchers wishing to use identification of structural VAR models via heteroskedasticity to make a more informed choice of a suitable model for a specific empirical analysis. An application investigating the interaction between U.S. monetary policy and the stock market is used to illustrate the related issues.

Aleksei Netsunajev, Katharina Glass

Uncertainty and Employment Dynamics in the Euro Area and the US

Published in: Journal of Macroeconomics (2017)

In this paper we investigate local and foreign effects of uncertainty shocks on unemployment in two large economic regions - the United States (US) and the Euro area (EA). We deploy Bayesian Markovswitching structural vector autoregressive model identified via heteroskedasticity. The shocks of interest are labeled as "US uncertainty" and "EA uncertainty" with the interpretation of demand side shocks. The local shocks influence labor market in both regions, while foreign effects are observed only for the EA. The US labor market tends to react and absorb shocks quicker than the labor market in EA. As economic theory predicts, reaction to (demand) uncertainty shocks points to possible market imperfections that are region specific.

Wenjuan Chen, Aleksei Netsunajev

On the Long-run Neutrality of Demand Shocks

Published in: Economics Letters (2016)

Long run neutrality restrictions have been widely used to identify structural shocks in VAR models. This paper revisits the seminal paper by Blanchard and Quah (1989), and investigates their identification scheme. We use structural VAR models with smoothly changing covariances for identification of shocks. The resulted impulse responses are economically meaningful. Formal test results reject the long-run neutrality of demand shocks.

Dieter Nautz, Aleksei Netsunajev and Till Strohsal

The Anchoring of Inflation Expectations in the Short and in the Long Run

Published in: SFB649 Working Papers (2016)

This paper introduces structural VAR analysis as a tool for investigating the anchoring of inflation expectations. We show that U.S. consumers inflation expectations are anchored in the long run because macro-news shocks are long-run neutral for long-term inflation expectations. The identification of structural shocks helps to explain why inflation expectations deviate from the central banks target in the short run. Our results indicate that the recent decline of long-term inflation expectations does not result from deanchoring macro-news but can be attributed to downward adjustments of consumers expectations about the central banks inflation target.

Dmitry Kulikov, Aleksei Netsunajev

Identifying Shocks in Structural VAR Models via Heteroskedasticity: a Bayesian Approach

Published in: Eesti Pank Working Papers (2015)

This paper contributes to the literature on statistical identification of macroeconomic shocks by proposing a Bayesian VAR with time varying volatility of the residuals that depends on a hidden Markov process, referred to as an MS-SVAR. With sufficient statistical information in the data and certain identifying conditions on the variance-covariance structure of the innovations, distinct volatility regimes of the reduced form residuals allow all structural SVAR matrices and impulse response functions to be estimated without the need for conventional a priori identifying restrictions. We give mathematical identification conditions and propose a novel combination of the Gibbs sampler and a Bayesian clustering algorithm for the posterior inference on MS-SVAR parameters. The new methodology is applied to US macroeconomic data on output, inflation, real money and policy rates, where the effects of two real and two nominal shocks are clearly identified.

Helmut Luetkepohl, Aleksei Netsunajev

Disentangling Demand and Supply Shocks in the Crude Oil Market: How to Check Sign Restrictions in Structural VARs

Published in: Journal of Applied Econometrics (2014)

Given the growing dissatisfaction with exclusion and long-run restrictions in structural vector autoregressive analysis, sign restrictions are becoming increasingly popular. So far there are no techniques for validating the shocks identified via such restrictions. Although in an ideal setting the sign restrictions specify shocks of interest, sign restrictions may be invalidated by measurement errors, data adjustments or omitted variables. We model changes in the volatility of the shocks via a Markov switching (MS) mechanism and use this devise to give the data a chance to object to sign restrictions. The approach is illustrated by considering a small model for the market of crude oil.

Aleksei Netsunajev, Lars Winkelmann

Inflation Expectations Spillovers between the United States and Euro Area

Published in: SFB649 Working Papers (2014)

We decompose expectations about inflation in the United States (US) and Euro Area (EA) into domestic and global components. To identify structural shocks, we exploit the heteroscedasticity inherent in US and EA financial markets’ inflation expectations. News-regression techniques are employed to support the economic interpretation of shocks. Similar to actual inflation, short horizon inflation expectations are mainly driven by global shocks. Spillovers from the US to the EA prevail. In contrast, longer term expectations are dominated by domestic shocks and spillovers from the EA to the US are important. During the global financial and European sovereign debt crisis overall spillovers decline significantly.

Helmut Luetkepohl, Aleksei Netsunajev

Structural Vector Autoregressions with Smooth Transition in Variances: The Interaction Between U.S. Monetary Policy and the Stock Market

Published in: SFB649 Working Papers (2014)

In structural vector autoregressive analysis identifying the shocks of interest via heteroskedasticity has become standard. Unfortunately, the approaches currently used for modelling heteroskedasticity all have drawbacks. Assuming known dates for variance changes is unrealistic while flexible models based on GARCH or Markov switching residuals are difficult to handle. We propose a model based on a smooth change in variance that is flexible and relatively easy to estimate. The model is applied to a system of U.S. variables to explore the interaction between monetary policy and the stock market. Previously used conventional identification schemes are rejected if heteroskedasticity is allowed for.

Aleksei Netsunajev, Natalja Netsunajeva

Slavic Menaion Manuscripts from the XI - XIV cc. and Principles of their Classification

Published in: Palaeobulgarica (2014)

In the present paper we analyze nine manuscripts of the XI-XIV cc. Menaions, Old-Slavic hymnographic texts, using vector space model. Analysis and classification of the manuscripts in the previous studies are rather subjective and are based on lingvo-textological properties of texts. On the contrary we use contemporary information search methods and represent the manuscripts as vectors in the common vector space. Vector space model allows to look at similarities and differences between the manuscripts at a different angle. This approach is more data driven and less subjective as opposed to the standard approach taken before. Vector analysis allows to distinguish the Putyatina Menaion and the Menaion Q.p.1.25 from the set of analyzed texts. These manuscripts share both textological and lexical similarities. Similar findings are reached in the existing studies. Manuscripts BAN16.14.13 and T.112 are shown to be mostly similar to the set of analyzed texts. This result is new to the literature. Most important are lexical differences between the considered set of texts while differences in grammar are less pronounced. This is important as the first feature shows dynamics of texts from Archaic to Ierusalem type while the latter feature shows dynamics of the language system.

Aleksei Netsunajev

Reaction to Technology Shocks in Markov-switchings Structural VARs: Identification via Heteroskedasticity

Published in: Journal of Macroeconomics (2013)

The paper reconsiders the conflicting results in the debate connected to the effects of technology shocks on hours worked. Given the major dissatisfaction with the just-identifying long-run restrictions, I analyze whether the restrictions used in the literature are consistent with the data. Modeling volatility of shocks using Markov switching structure allows to obtain additional identifying information and perform tests of the restrictions that were just-identifying in classical structural vector autoregressive analysis. Using six ways of identifying technology shocks, I find that not all of them are supported by the data. There is no clear-cut evidence in favor of a positive reaction of hours to technology shocks.

Grigori Fainstein, Aleksei Netsunajev

Intra-Industry Trade Development in the Baltic States

Published in: Emerging Markets Finance and Trade (2011)

This paper investigates intra-industry trade (IIT) dynamics for Estonia, Latvia and Lithuania in the years 1999-2007. Intra-industry trade is decomposed into its vertical and horizontal components on the basis of differences in import and export unit values. Results show that shares of IIT have increased within the period, with vertical IIT dominating. Shares of total vertical and horizontal IIT grew since 2004, the year of accession to the EU. Using panel data analysis we estimate three static models and a dynamic model of IIT determinants. We find market size to be important in the Baltic States for IIT in general and particularly for horizontal IIT. A negative relationship between distance and share of IIT is a standard finding. Among factor endowment variables we find difference in human capital to be significant in explaining IIT.

Grigori Fainstein, Aleksei Netsunajev

Foreign Trade Pattern between Estonia and the EU

Published in: International Advances in Economic Research (2009)

In this paper, we focus on the development of the foreign trade flows between Estonia and the EU. We observe rapid reorientation of the trade flows from the former Soviet Union towards Western markets because of economic reforms and foreign trade liberalization. Moreover, we determine the commodity groups with a comparative advantage in the EU market and analyze its dynamics. Further analysis of the intra-industry trade (ITT) shows that vertical IIT plays a dominant role in Estonian-EU IIT flows. Shares of total, vertical, and horizontal IIT have grown rapidly since 2004, the year of accession to the EU.