<p>I typically think that the Federal Funds rate is chosen based on inflation/unemployment, and then the rates for corporate bonds are anchored on the Federal Funds rate.</p>
<p>In such a case, a shock to the Federal Funds rate should affect both, but a shock to corporate bonds should not affect the Federal Funds rate.</p>
<p>Thus, I would put the FFR third.</p>
<p>I am not a macroeconomist, so if a contradictory answer is given by a macro person, they are probably correct.</p>

CC BY-SA 4.0
2023-03-01T07:26:04.467Z
2023-03-01T07:26:04.467Z
Michael Gmeiner
<p>In some papers in monetary economics (see below), I've seen used a 4-equation VAR with log industrial production, log consumer price index, the federal funds rate (FFR), and the excess bond premium (EBP)  [a la Gilchrist and Zakrajšek].</p>
<p>In a Cholesky set up for impulse responses, would one typically order the FFR third or fourth in the VAR (with the EBP correspondingly fourth or third, respectively)?</p>
<p>= = = = = =</p>
<p>Gertler, M. and P. Karadi (2015). Monetary Policy Surprises, Credit Costs, and Economic Activity. American Economic Journal: Macroeconomics, 7 (1), 44–76.</p>
<p>Bauer, M. D. and E. T. Swanson (2022). A Reassessment of Monetary Policy Surprises and High-Frequency Identification, NBER Chapters, in: NBER Macroeconomics Annual 2022, 37, National Bureau of Economic Research, Inc</p>

CC BY-SA 4.0
2023-02-27T10:52:33.723Z
Are you asking about the theory regarding why order matters? Or, do you know why the order matters, and you are asking, in this specific context, what order should be chosen?
Michael Gmeiner
CC BY-SA 4.0
2023-02-28T16:52:17.137Z
the latter: in this specific context, what order should be chosen
cel
<monetary-policy><svar>
Cholesky Ordering in Monetary VAR
cel
# Cholesky Ordering in Monetary VAR

(Asked by: username_0 on 2023-02-22)

In some papers in monetary economics (see below), I've seen used a 4-equation VAR with log industrial production, log consumer price index, the federal funds rate (FFR), and the excess bond premium (EBP) [a la Gilchrist and Zakrajšek].

In a Cholesky set up for impulse responses, would one typically order the FFR third or fourth in the VAR (with the EBP correspondingly fourth or third, respectively)?

= = = = = =

Gertler, M. and P. Karadi (2015). Monetary Policy Surprises, Credit Costs, and Economic Activity. American Economic Journal: Macroeconomics, 7 (1), 44–76.

Bauer, M. D. and E. T. Swanson (2022). A Reassessment of Monetary Policy Surprises and High-Frequency Identification, NBER Chapters, in: NBER Macroeconomics Annual 2022, 37, National Bureau of Economic Research, Inc

**Tags:** monetary-policy, svar
> **Comments:**
> **username_1**: Are you asking about the theory regarding why order matters? Or, do you know why the order matters, and you are asking, in this specific context, what order should be chosen?  
> **username_0**: the latter: in this specific context, what order should be chosen  

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## 1 answers

### Answer by username_1 on 2023-03-01. Score: 2

I typically think that the Federal Funds rate is chosen based on inflation/unemployment, and then the rates for corporate bonds are anchored on the Federal Funds rate.

In such a case, a shock to the Federal Funds rate should affect both, but a shock to corporate bonds should not affect the Federal Funds rate.

Thus, I would put the FFR third.

I am not a macroeconomist, so if a contradictory answer is given by a macro person, they are probably correct.


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