IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2405.09509.html
   My bibliography  Save this paper

Double Robustness of Local Projections and Some Unpleasant VARithmetic

Author

Listed:
  • Jos'e Luis Montiel Olea
  • Mikkel Plagborg-M{o}ller
  • Eric Qian
  • Christian K. Wolf

Abstract

We consider impulse response inference in a locally misspecified vector autoregression (VAR) model. The conventional local projection (LP) confidence interval has correct coverage even when the misspecification is so large that it can be detected with probability approaching 1. This result follows from a "double robustness" property analogous to that of popular partially linear regression estimators. In contrast, the conventional VAR confidence interval with short-to-moderate lag length can severely undercover, even for misspecification that is small, economically plausible, and difficult to detect statistically. There is no free lunch: the VAR confidence interval has robust coverage only if the lag length is so large that the interval is as wide as the LP interval.

Suggested Citation

  • Jos'e Luis Montiel Olea & Mikkel Plagborg-M{o}ller & Eric Qian & Christian K. Wolf, 2024. "Double Robustness of Local Projections and Some Unpleasant VARithmetic," Papers 2405.09509, arXiv.org, revised Aug 2024.
  • Handle: RePEc:arx:papers:2405.09509
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2405.09509
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Checherita-Westphal, Cristina & Pesso, Tom, 2024. "Fiscal policy and inflation: accounting for non-linearities in government debt," Working Paper Series 2996, European Central Bank.
    2. Ordoñez Lucas Sebastián, 2024. "The transmission of Supply Shocks to inflation: The case of Argentina (2004-2023)," Asociación Argentina de Economía Política: Working Papers 4750, Asociación Argentina de Economía Política.
    3. Òscar Jordà & Alan M. Taylor, 2024. "Local Projections," Working Paper Series 2024-24, Federal Reserve Bank of San Francisco.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adnan Haider Bukhari & Safdar Ullah Khan, 2008. "A Small Open Economy DSGE Model for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 47(4), pages 963-1008.
    2. Fernando Alvarez & Francesco Lippi & Juan Passadore, 2017. "Are State- and Time-Dependent Models Really Different?," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 379-457.
    3. Punzi, Maria Teresa, 2016. "Financial cycles and co-movements between the real economy, finance and asset price dynamics in large-scale crises," FinMaP-Working Papers 61, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    4. Anastasios Evgenidis & Stephanos Papadamou, 2021. "The impact of unconventional monetary policy in the euro area. Structural and scenario analysis from a Bayesian VAR," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5684-5703, October.
    5. Evans, Charles L. & Marshall, David A., 2007. "Economic determinants of the nominal treasury yield curve," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1986-2003, October.
    6. Filippo Occhino, 2001. "Monetary Policy Shocks in an Economy with Segmented Markets," Departmental Working Papers 200108, Rutgers University, Department of Economics.
    7. François R. Velde, 2009. "Chronicle of a Deflation Unforetold," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 591-634, August.
    8. Patrick A. Imam, 2015. "Shock from Graying: Is the Demographic Shift Weakening Monetary Policy Effectiveness," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 20(2), pages 138-154, March.
    9. Vitek, Francis, 2006. "Measuring the Stance of Monetary Policy in a Small Open Economy: A Dynamic Stochastic General Equilibrium Approach," MPRA Paper 802, University Library of Munich, Germany.
    10. Stefan Laséen & Andrea Pescatori, 2020. "Financial stability and interest‐rate policy: A quantitative assessment of costs and benefit," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 53(3), pages 1246-1273, August.
    11. Francisco de Castro, 2006. "The macroeconomic effects of fiscal policy in Spain," Applied Economics, Taylor & Francis Journals, vol. 38(8), pages 913-924.
    12. Zsolt Darvas, 2013. "Monetary transmission in three central European economies: evidence from time-varying coefficient vector autoregressions," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 40(2), pages 363-390, May.
    13. Carlstrom, Charles T. & Fuerst, Timothy S. & Paustian, Matthias, 2009. "Monetary policy shocks, Choleski identification, and DNK models," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 1014-1021, October.
    14. Victor Echevarria Icaza & Simón Sosvilla-Rivero, 2017. "Yields on sovereign debt, fragmentation and monetary policy transmission in the euro area: A GVAR approach," Working Papers 17-01, Asociación Española de Economía y Finanzas Internacionales.
    15. Rémy Charleroy & Michael A. Stemmer, 2014. "An Emerging Market Financial Conditions Index: A VAR Approach," Documents de travail du Centre d'Economie de la Sorbonne 14068, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    16. Hyeongwoo Kim, 2018. "Fiscal Policy, Wages, and Jobs in the U.S," Auburn Economics Working Paper Series auwp2018-02, Department of Economics, Auburn University.
    17. Hyeongwoo Kim & Ying Lin, 2018. "Exchange Rate Pass-Through to Consumer Prices and the Role of Energy Prices," Auburn Economics Working Paper Series auwp2018-05, Department of Economics, Auburn University.
    18. Tianye Lin & Yangyang Ji & Sen Zhang, 2020. "Real Estate, Interest Rates, and Crowding-out Effects," CEMA Working Papers 613, China Economics and Management Academy, Central University of Finance and Economics.
    19. Miranda-Agrippino, Silvia & Ricco, Giovanni, 2018. "Bayesian Vector Autoregressions," The Warwick Economics Research Paper Series (TWERPS) 1159, University of Warwick, Department of Economics.
    20. Croushore, Dean & Evans, Charles L., 2006. "Data revisions and the identification of monetary policy shocks," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1135-1160, September.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2405.09509. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.