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Model-Free Impulse Responses

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Author Info
Jorda, Oscar (U of California, Davis)

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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.

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Paper provided by University of California at Davis, Department of Economics in its series Working Papers with number 06-8.

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Date of creation: Jan 2004
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Handle: RePEc:ecl:ucdeco:06-8

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation

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  30. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June. [Downloadable!] (restricted)
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  31. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
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  33. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September. [Downloadable!] (restricted)
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