Authors and guest post by Davaajargal Luvsannyam and Ulziikhutag Munkhtsetseg
Nowadays, sign restricted VARs (SRVARs) are becoming popular and can be considered as an indispensable tool for macroeconomic analysis. They have been used for macroeconomic policy analysis when investigating the sources of business cycle fluctuations and providing a benchmark against which modern dynamic macroeconomic theories are evaluated. Traditional structural VARs are identified with the exclusion restriction which is sometimes difficult to justify by economic theory. In contrast, SRVARs can easily identify structural shocks since in many cases, economic theory only offers guidance on the sign of structural impulse responses on impact.
