The Reserve Bank of Australia published a Research Discussion Paper proposing a method to identify structural vector autoregressions (SVARs) using “shock-percentile” restrictions, designed to capture the belief that a selected historical episode features a relatively large structural shock. The approach requires the realised shock in the chosen episode to lie in the tail of the shock’s historical distribution, positioning it as an alternative to imposing numeric bounds on shock magnitudes that may be difficult to specify credibly. Simulations suggest the restrictions can provide identifying information, and two empirical applications use the method to disentangle the relationship between uncertainty and real activity and to sharpen identification of the macroeconomic effects of US monetary policy.
Reserve Bank of Australia 2026-03-01
Reserve Bank of Australia paper proposes shock-percentile restrictions to identify SVARs
The Reserve Bank of Australia published a Research Discussion Paper proposing a new method to identify structural vector autoregressions using “shock-percentile” restrictions, which assume a selected historical episode contains a tail-event structural shock. The approach offers an alternative to numeric bounds on shock magnitudes, with simulations and empirical applications indicating it can help disentangle the relationship between uncertainty and real activity and refine identification of U.S. monetary policy’s macroeconomic effects.