Local Linear Impulse Responses for a Small Open Economy

Traditional vector autoregressions derive impulse responses using iterative techniques that may compound specification errors. Local projection techniques are more robust to this problem, and Monte Carlo evidence has suggested they provide reliable estimates of the true impulse responses. We use loc...

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Bibliographic Details
Published in:Oxford bulletin of economics and statistics 2012-06, Vol.74 (3), p.470-492
Main Authors: Haug, Alfred A., Smith, Christie
Format: Article
Language:English
Subjects:
C51
E52
Economic models
F41
Forecasts
GDP
Gross Domestic Product
Impulse response functions
Linear models
Monetary policy
Monte Carlo simulation
New Zealand
Open economies
Regression analysis
Studies
Vector-autoregressive models
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Summary:Traditional vector autoregressions derive impulse responses using iterative techniques that may compound specification errors. Local projection techniques are more robust to this problem, and Monte Carlo evidence has suggested they provide reliable estimates of the true impulse responses. We use local linear projections to investigate the dynamic properties of a model for a small open economy, New Zealand. We compare impulse responses from projections to those from standard techniques, and consider the implications for monetary policy. We pay careful attention to the dimensionality of the model, and focus on effects of policy on gross domestic product, interest rates, prices and exchange rates.
ISSN:0305-9049
1468-0084
DOI:10.1111/j.1468-0084.2011.00643.x