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Bayesian Flexible Local Projections

Author

Listed:
  • Brugnolini Luca

    (Zug, Switzerland)

  • Catania Leopoldo

    (Department of Economics and Business Economics, Aarhus University, Aarhus, Denmark)

  • Hansen Pernille

    (Copenhagen, Denmark)

  • Santucci de Magistris Paolo

    (Department of Economics and Finance, Luiss University, Viale Romania 32, 00197 Roma, Italy)

Abstract

We develop a methodology to estimate impulse response functions via Bayesian techniques with the goal of providing a bridge between a linear vector autoregressive specification and a high-order polynomial local projection, namely flexible local projection. We label this methodology Bayesian Flexible Local Projection (BFLP). We assess the properties of BFLP in a Monte Carlo framework considering both linear and non-linear models as data generating processes. We also empirically illustrate how BFLP can be used with standard identification strategies. In particular, we show how to use external instruments to identify the effects of the monetary policy shock in the United States. Furthermore, exploiting the time-varying nature of the impulse response functions based on BFLP, we assess the zero lower bound irrelevance hypothesis and find no strong evidence that monetary policy was less effective in influencing output and inflation during the recent ZLB period.

Suggested Citation

  • Brugnolini Luca & Catania Leopoldo & Hansen Pernille & Santucci de Magistris Paolo, 2024. "Bayesian Flexible Local Projections," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 28(2), pages 435-462, April.
    • Handle: RePEc:bpj:sndecm:v:28:y:2024:i:2:p:435-462:n:11
    DOI: 10.1515/snde-2023-0001
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    More about this item

    Keywords

    impulse response functions; vector autoregressions; local projections; monetary policy;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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