Identification in structural vector autoregressive models with structural changes, with an application to U.S. monetary policy

A growing line of research makes use of structural changes and different volatility regimes found in the data in a constructive manner to improve the identification of structural parameters in Structural Vector Autoregressions (SVARs). A standard assumption made in the literature is that the reduced form unconditional error covariance matrix varies while the structural parameters remain constant. Under this hypothesis, it is possible to identify the SVAR without needing to resort to additional restrictions. With macroeconomic data, the assumption that the transmission mechanism of the shocks does not vary across volatility regimes is debatable. We derive novel necessary and sufficient rank conditions for local identification of SVARs, where both the error covariance matrix and the structural parameters are allowed to change across volatility regimes. Our approach generalizes the existing literature on ‘identification through changes in volatility’ to a broader framework and opens up interesting possibilities for practitioners. An empirical illustration focuses on a small monetary policy SVAR of the U.S. economy and suggests that monetary policy has become more effective at stabilizing the economy since the 1980s.