Finance and Economics Discussion Series

Are Spectral Estimators Useful for Implementing Long-Run Restrictions in SVARs?

Elmar Mertens
2010-09

Abstract: No, not really, since spectral estimators suffer from small sample and misspecification biases just as VARs do. Spectral estimators are no panacea for implementing long-run restrictions.

In addition, when combining VAR coefficients with non-parametric estimates of the spectral density, care needs to be taken to consistently account for information embedded in the non-parametric estimates about serial correlation in VAR residuals. This paper uses a spectral factorization to ensure a correct representation of the data's variance. But this cannot overcome the fundamental problems of estimating the long-run dynamics of macroeconomic data in samples of typical length.

Keywords: Structural VAR, long-run identification, non-parametric estimation, spectral factorization