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

  • $\begingroup$ 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? $\endgroup$ Feb 27, 2023 at 10:52
  • $\begingroup$ the latter: in this specific context, what order should be chosen $\endgroup$
    – user37250
    Feb 28, 2023 at 16:52

1 Answer 1


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.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.