Modeling Macro-Financial Linkages Combined Impulse Response Functions in SVAR Models

Abstract

We estimated a structural vector autoregressive (SVAR) model describing
the links between a banking sector and a real economy. We proposed a new
method to verify robustness of impulse-response functions to the ordering of
variables in an SVAR model. This method applies permutations of orderings of
variables and uses the Cholesky decomposition of the error covariance matrix to
identify parameters. Impulse response functions are computed and combined for
all permutations. We explored the method in practice by analyzing the macrofinancial linkages in the Polish economy. Our results indicate that the combined
impulse response functions are more uncertain than those from a single model
specification with a given ordering of variables, but some findings remain robust.
It is evident that macroeconomic aggregate shocks and interest rate shocks have
a significant impact on banking variables.