<p>How do you do a permanent shock in a VAR/SVAR model? I know you can place zero long-run restrictions, as in Blanchard and Quah like</p>
<pre><code>matrix C = (., 0\.,.,)
svar Ygr unemp, lags(1/8) lreq(C)
</code></pre>
<p>This gives the following graph (the black IRFs).</p>
<p><a href="https://i.sstatic.net/oYbMB.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/oYbMB.png" alt="enter image description here" /></a></p>
<p>But what if you do not want the effect of unemployment shock on unemployment (i.e., bottom right plot) to fall to zero but rather falls to some positive constant, say, 0.4 over time (indicated by the red dashed line). How would the code change?</p>

CC BY-SA 4.0
2022-11-30T17:36:46.553Z
For a shock to be permanent there has to be unit root in the variable you shock. With unit root you get hysteresis (that is single shocks leading to permanent changes). However, SVAR by assumption requires all series to  be stationary. Otherwise your SVAR will be biased. If you want to have shocks with permanent effects you should not use SVAR to begin with.
1muflon1
CC BY-SA 4.0
2022-12-01T10:07:51.377Z
In the paper "The long-run relationship between inflation and output in postwar economies" by James Bullard & John W. Keating, they study the effect of a permanent inflation shock on output using an SVAR model. They follow Blanchard and Quah and impose a similar long-run restriction on matrix C (as in Blanchard and Quah) in a bivariate model. Their model contains changes in the inflation rate (d.pi) and changes in the log of real output (d.y). I think I understand what they do. But in stata, it seems I can only get the responses of d.pi and d.y to the permanent shock.
Emmanuel Ameyaw
CC BY-SA 4.0
2022-12-01T10:09:48.170Z
However, the IRFs they report are responses of pi (inflation rate) and y (output) to the permanent shock. Maybe they did that manually. That is, after getting the responses of d.pi and d.y to the permanent shock, you then manually compute the responses of pi and y.
Emmanuel Ameyaw
CC BY-SA 4.0
2022-12-01T10:24:04.293Z
If it is not clear. I will ask in another question.
Emmanuel Ameyaw
CC BY-SA 4.0
2022-12-01T11:36:04.070Z
you do not need to ask new question, rather you could edit this one. It is possible I misunderstand what you mean here by permanent shock, it would be best if you would link the paper and add little bit context
1muflon1
CC BY-SA 4.0
2022-12-02T01:42:23.383Z
Thanks. I already added the paper: "The long-run relationship between inflation and output in postwar economies" by James Bullard & John W. Keating. Permanent inflation shock, for example, has a long-run non-zero effect on the inflation rate. So in my original question, a permanent unemployment shock will have a long-run non-zero effect on the unemployment rate.
Emmanuel Ameyaw
CC BY-SA 4.0
2024-03-12T12:36:23.017Z
What does a permanent inflation shock mean? A permanently higher (annual) change in the price level?
Pavel Filip
<econometrics>
How do you do a permanent shock in VAR/SVAR model?
Emmanuel Ameyaw
# How do you do a permanent shock in VAR/SVAR model?

(Asked by: username_0 on 2022-11-30)

How do you do a permanent shock in a VAR/SVAR model? I know you can place zero long-run restrictions, as in Blanchard and Quah like

```
matrix C = (., 0\.,.,)
svar Ygr unemp, lags(1/8) lreq(C)

```

This gives the following graph (the black IRFs).

[![enter image description here](https://i.sstatic.net/oYbMB.png)](https://i.sstatic.net/oYbMB.png)

But what if you do not want the effect of unemployment shock on unemployment (i.e., bottom right plot) to fall to zero but rather falls to some positive constant, say, 0.4 over time (indicated by the red dashed line). How would the code change?

**Tags:** econometrics

> **Comments:**
> **username_1**: For a shock to be permanent there has to be unit root in the variable you shock. With unit root you get hysteresis (that is single shocks leading to permanent changes). However, SVAR by assumption requires all series to  be stationary. Otherwise your SVAR will be biased. If you want to have shocks with permanent effects you should not use SVAR to begin with.  
> **username_0**: In the paper "The long-run relationship between inflation and output in postwar economies" by James Bullard & John W. Keating, they study the effect of a permanent inflation shock on output using an SVAR model. They follow Blanchard and Quah and impose a similar long-run restriction on matrix C (as in Blanchard and Quah) in a bivariate model. Their model contains changes in the inflation rate (d.pi) and changes in the log of real output (d.y). I think I understand what they do. But in stata, it seems I can only get the responses of d.pi and d.y to the permanent shock.  
> **username_0**: However, the IRFs they report are responses of pi (inflation rate) and y (output) to the permanent shock. Maybe they did that manually. That is, after getting the responses of d.pi and d.y to the permanent shock, you then manually compute the responses of pi and y.  
> **username_0**: If it is not clear. I will ask in another question.  
> **username_1**: you do not need to ask new question, rather you could edit this one. It is possible I misunderstand what you mean here by permanent shock, it would be best if you would link the paper and add little bit context  
> **username_0**: Thanks. I already added the paper: "The long-run relationship between inflation and output in postwar economies" by James Bullard & John W. Keating. Permanent inflation shock, for example, has a long-run non-zero effect on the inflation rate. So in my original question, a permanent unemployment shock will have a long-run non-zero effect on the unemployment rate.  
> **username_2**: What does a permanent inflation shock mean? A permanently higher (annual) change in the price level?  

---

## 0 answers

