Impulse response diagnostics for priors on parameters in structural vector autoregressions

Abstract

Structural impulse response functions may be estimated based on priors about the parameters of the structural VAR presentation. Even when such priors appear seemingly reasonable, they may imply an unintentionally informative prior for the structural impulse responses. Rather than pretending that the posterior of the impulse responses does not depend on this prior, the proposal in this paper is to verify that the prior distribution of the vector of impulse responses of interest is not unintentionally informative. Moreover, if the impulse response prior is intentionally informative, this point must be conveyed, so the reader can properly evaluate the reported conclusions. This paper discusses easy-to-use diagnostic tools that help practitioners address these concerns.