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Local Linear Impulse Responses for a Small Open Economy

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  • Alfred A. Haug
  • Christie Smith

Abstract

Traditional vector autoregressions derive impulse responses using iterative techniques that may compound specification errors. Local projection techniques are robust to this problem, and Monte Carlo evidence suggests 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 local 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 the effects of policy on GDP, interest rates, prices and the exchange rate.

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File URL: http://hdl.handle.net/10.1111/j.1468-0084.2011.00643.x
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Bibliographic Info

Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 74 (2012)
Issue (Month): 3 (06)
Pages: 470-492

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Handle: RePEc:bla:obuest:v:74:y:2012:i:3:p:470-492

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Cited by:
  1. Chevillon, Guillaume, 2009. "Multi-step forecasting in emerging economies: An investigation of the South African GDP," International Journal of Forecasting, Elsevier, vol. 25(3), pages 602-628, July.
  2. Sandra Eickmeier & Tim Ng, 2009. "Forecasting national activity using lots of international predictors: an application to New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2009/04, Reserve Bank of New Zealand.
  3. Stefano Puddu, 2013. "Real Sector and Banking System: Real and Feedback Effects. A Non-Linear VAR Approach," IRENE Working Papers 13-01, IRENE Institute of Economic Research.
  4. Basher, Syed Abul & Haug, Alfred A. & Sadorsky, Perry, 2011. "Oil prices, exchange rates and emerging stock markets," MPRA Paper 30140, University Library of Munich, Germany.
  5. Aaron Drew & Özer Karagedikli, 2008. "Some benefits of monetary policy transparency in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/01, Reserve Bank of New Zealand.
  6. Chris Bloor & Troy Matheson, 2010. "Analysing shock transmission in a data-rich environment: a large BVAR for New Zealand," Empirical Economics, Springer, vol. 39(2), pages 537-558, October.
  7. Chris McDonald, 2012. "Kiwi drivers the New Zealand dollar experience," Reserve Bank of New Zealand Analytical Notes series AN2012/02, Reserve Bank of New Zealand.
  8. Özer Karagedikli & Rishab Sethi & Christie Smith & Aaron Drew, 2008. "Changes in the transmission mechanism of monetary policy in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/03, Reserve Bank of New Zealand.
  9. Kilian, Lutz & Kim, Yun Jung, 2009. "Do Local Projections Solve the Bias Problem in Impulse Response Inference?," CEPR Discussion Papers 7266, C.E.P.R. Discussion Papers.
  10. Ronayne, David, 2011. "Which Impulse Response Function?," The Warwick Economics Research Paper Series (TWERPS) 971, University of Warwick, Department of Economics.

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