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Measuring Dynamic Transmission Using Pass-Through Impulse Response Functions

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Abstract

I propose the pass-through impulse response function (PT-IRF) as a novel reduced-form empirical approach to measuring transmission channel dynamics. In essence, a PT-IRF quantifies the propagation of a shock through the Granger causality of a specified set of endogenous variables within a dynamical system. This approach has fewer informational requirements than alternative methods, such as structural parameter and empirical policy counterfactual exercises. A PT-IRF only requires the specification of a reduced-form VAR and identification of a shock of interest, bypassing the need to either build a structural model or identify multiple shocks. I demonstrate the flexibility of PT-IRFs by empirically analyzing the indirect dynamic transmission of oil price shocks to inflation and output via interest rates, as well as the indirect dynamic effect of monetary policy shocks on output via changes in credit supply.

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  • Nikolaishvili, Giorgi, 2025. "Measuring Dynamic Transmission Using Pass-Through Impulse Response Functions," Working Papers 121, Wake Forest University, Economics Department.
    • Handle: RePEc:ris:wfuewp:0121
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    Keywords

    Directed graph; dynamic propagation; Granger causality; vector autoregression;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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