Dynamic Effects of Persistent Shocks
Carlos Sanz and
Jesus Gonzalo ()
UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía
We show that several shocks identified without restrictions from a model, and frequently used in the empirical literature, display some persistence. We demonstrate that the two leading methods to recover impulse responses to shocks (moving average representations and local projections) treat persistence differently, hence identifying different objects. In particular, standard local projections identify responses that includean effect due to the persistence of the shock, while moving average representations implicitly account for it. We propose methods to re-establish the equivalence between local projections and moving average representations. In particular, the inclusion ofleads of the shock in local projections allows to control for its persistence and rendersthe resulting responses equivalent to those associated to counterfactual non-serially correlated shocks. We apply this method to well-known empirical work on fiscal andmonetary policy and find that accounting for persistence has a sizable impact on the estimates of dynamic effects.
Keywords: Impulse; Response; Function; Local; Projection; Shock; Fiscal Policy; Monetary; Policy (search for similar items in EconPapers)
JEL-codes: C32 E32 E52 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-ore
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Working Paper: Dynamic Effects of Persistent Shocks (2020)
Working Paper: Dynamic effects of persistent shocks (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:29187
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