Reducing confidence bands for simulated impulse responses

It is emphasized that the shocks in structural vector autoregressions are only identified up to sign and it is pointed out that this feature can result in very misleading confidence intervals for impulse responses if simulation methods such as Bayesian or bootstrap methods are used. The confidence intervals heavily depend on which variable is used for fixing the signs of the responses. In particular, when the shocks are identified via long-run restrictions the problem can be severe. It is pointed out that a suitable choice of variable for fixing the signs of the responses and, hence, of the shocks, can result in substantial reductions in the confidence bands for impulse responses. Copyright Springer-Verlag Berlin Heidelberg 2013