About Local Projection Impulse Response Function Reliability
Luca Brugnolini ()
No 440, CEIS Research Paper from Tor Vergata University, CEIS
I compare the performance of the vector autoregressive (VAR) model impulse response function estimator with the Jordà (2005) local projection (LP) methodology. In a Monte Carlo experiment, I demonstrate that when the data generating process is a well-specified VAR, the standard impulse response function estimator is the best option. However, when the sample size is small, and the model lag-length is misspecified, I prove that the local projection estimator is a competitive alternative. Finally, I show how to improve the local projection performance by fixing the lag-length at each horizon.
Keywords: VAR; information criteria; lag-length; Monte Carlo (search for similar items in EconPapers)
JEL-codes: C32 C52 C53 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mac and nep-ore
Date: 2018-06-09, Revised 2018-06-09
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