Model-Free Impulse Responses

Oscar Jorda ()

Macroeconomics from EconWPA

Abstract: This paper introduces methods for computing impulse response functions that do not require specification and estimation of the unknown dynamic multivariate system itself. The central idea behind these methods is to estimate flexible local projections at each period of interest rather than extrapolating into increasingly distant horizons from a given model, as it is usually done in vector autoregressions (VAR). The advantages of local projections are numerous: (1) they can be estimated by simple regression techniques with standard regression packages; (2) they are more robust to misspecification; (3) standard error calculation is direct; and (4) they easily accommodate experimentation with highly non-linear and flexible specifications that may be impractical in a multivariate context. Therefore, these methods are a natural alternative to estimating impulse responses from VARs. An application to a simple, closed-economy monetary model suggests that the output loss and inflation effects of an interest rate shock depend on the stage of the business cycle.

Keywords: impulse response function; local projection; vector autoregression; nonlinear (search for similar items in EconPapers)
JEL-codes: C32 E47 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp, nep-ecm, nep-ets and nep-mac
Date: 2004-03-24
Note: Type of Document - pdf; pages: 44. U.C. Davis Working Paper 03-08
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http://129.3.20.41/eps/mac/papers/0403/0403016.pdf (application/pdf)

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