| Abstract: |
This note discusses a pitfall of using the generalized impulse response
function (GIRF) in vector autoregressive (VAR) models (Pesaran and Shin,
1998). The GIRF is general because it is invariant to the ordering of the
variables in the VAR. The GIRF, in fact, is extreme because it yields a set of
response functions that are based on extreme identifying assumptions that
contradict each other, unless the covariance matrix is diagonal. With a help
of empirical examples, the present note demonstrates that the GIRF may yield
quite misleading economic inferences. |