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Estimation and Inference of Impulse Responses by Local Projections

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  • Òscar Jordà

Abstract

This paper introduces methods to compute impulse responses without specification and estimation of the underlying multivariate dynamic system. The central idea consists in estimating local projections at each period of interest rather than extrapolating into increasingly distant horizons from a given model, as it is done with 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) joint or point-wise analytic inference is simple; and (4) they easily accommodate experimentation with highly nonlinear and flexible specifications that may be impractical in a multivariate context. Therefore, these methods are a natural alternative to estimating impulse responses from VARs. Monte Carlo evidence and an application to a simple, closed-economy, new-Keynesian model clarify these numerous advantages.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 1 (March)
Pages: 161-182

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Handle: RePEc:aea:aecrev:v:95:y:2005:i:1:p:161-182

Note: DOI: 10.1257/0002828053828518
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  1. Fiscal Policy during high unemployment periods: still a bad idea?
    by sebastianfleitas in NEP-HIS blog on 2013-03-04 13:37:19
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