IDEAS home Printed from https://ideas.repec.org/a/bla/obuest/v84y2022i5p1101-1122.html
   My bibliography  Save this article

A Guide to Autoregressive Distributed Lag Models for Impulse Response Estimations

Author

Listed:
  • ChaeWon Baek
  • Byoungchan Lee

Abstract

We provide a guide to using autoregressive distributed lag models for impulse response estimations with an identified structural shock or an external instrument for the shock. We illustrate how specifications widely used in practice can lead to inconsistent and inefficient estimators. We further review empirical results from previous papers and show that some results appear to be statistical artefacts. We propose a simple method to avoid such a false conclusion from biases or large standard errors and obtain consistent and precise estimates.

Suggested Citation

  • ChaeWon Baek & Byoungchan Lee, 2022. "A Guide to Autoregressive Distributed Lag Models for Impulse Response Estimations," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(5), pages 1101-1122, October.
    • Handle: RePEc:bla:obuest:v:84:y:2022:i:5:p:1101-1122
    DOI: 10.1111/obes.12494
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/obes.12494
    Download Restriction: no
    File URL: https://libkey.io/10.1111/obes.12494?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
    2. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
    3. Hendry, David F. & Pagan, Adrian R. & Sargan, J.Denis, 1984. "Dynamic specification," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 18, pages 1023-1100, Elsevier.
    4. Miles S. Kimball & John G. Fernald & Susanto Basu, 2006. "Are Technology Improvements Contractionary?," American Economic Review, American Economic Association, vol. 96(5), pages 1418-1448, December.
    5. Karel Mertens & Morten O. Ravn, 2013. "The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States," American Economic Review, American Economic Association, vol. 103(4), pages 1212-1247, June.
    6. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-652, June.
    7. Rabah Arezki & Valerie A. Ramey & Liugang Sheng, 2017. "News Shocks in Open Economies: Evidence from Giant Oil Discoveries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(1), pages 103-155.
    8. Kuersteiner, Guido M., 2005. "Automatic Inference For Infinite Order Vector Autoregressions," Econometric Theory, Cambridge University Press, vol. 21(1), pages 85-115, February.
    9. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 1-50.
    10. Valerie Cerra & Sweta Chaman Saxena, 2008. "Growth Dynamics: The Myth of Economic Recovery," American Economic Review, American Economic Association, vol. 98(1), pages 439-457, March.
    11. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    12. Alesina, Alberto & Favero, Carlo & Giavazzi, Francesco, 2015. "The output effect of fiscal consolidation plans," Journal of International Economics, Elsevier, vol. 96(S1), pages 19-42.
    13. Kilian,Lutz & Lütkepohl,Helmut, 2018. "Structural Vector Autoregressive Analysis," Cambridge Books, Cambridge University Press, number 9781107196575.
    14. Daron Acemoglu & Suresh Naidu & Pascual Restrepo & James A. Robinson, 2019. "Democracy Does Cause Growth," Journal of Political Economy, University of Chicago Press, vol. 127(1), pages 47-100.
    15. Regis Barnichon & Christian Brownlees, 2019. "Impulse Response Estimation by Smooth Local Projections," The Review of Economics and Statistics, MIT Press, vol. 101(3), pages 522-530, July.
    16. Olivier Coibion, 2012. "Are the Effects of Monetary Policy Shocks Big or Small?," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 1-32, April.
    17. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    18. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
    19. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    20. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    21. D. Poskitt, 2007. "Autoregressive approximation in nonstandard situations: the fractionally integrated and non-invertible cases," Annals of the Institute of Statistical Mathematics, Springer;The Institute of Statistical Mathematics, vol. 59(4), pages 697-725, December.
    22. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
    23. Yuriy Gorodnichenko & Byoungchan Lee, 2020. "Forecast Error Variance Decompositions with Local Projections," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(4), pages 921-933, October.
    24. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    25. Shiller, Robert J, 1973. "A Distributed Lag Estimator Derived from Smoothness Priors," Econometrica, Econometric Society, vol. 41(4), pages 775-788, July.
    26. Lutz Kilian, 2008. "Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy?," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 216-240, May.
    27. Emi Nakamura & Jón Steinsson, 2018. "Identification in Macroeconomics," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 59-86, Summer.
    28. Mario Forni & Luca Gambetti & Luca Sala, 2019. "Structural VARs and noninvertible macroeconomic models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(2), pages 221-246, March.
    29. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184, National Bureau of Economic Research, Inc.
    30. James H. Stock & Mark W. Watson, 2018. "Identification and Estimation of Dynamic Causal Effects in Macroeconomics Using External Instruments," Economic Journal, Royal Economic Society, vol. 128(610), pages 917-948, May.
    31. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    32. Andrew J. Jalil, 2015. "A New History of Banking Panics in the United States, 1825-1929: Construction and Implications," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 295-330, July.
    33. Michelle Alexopoulos, 2011. "Read All about It!! What Happens Following a Technology Shock?," American Economic Review, American Economic Association, vol. 101(4), pages 1144-1179, June.
    34. Solomon M. Hsiang & Amir S. Jina, 2014. "The Causal Effect of Environmental Catastrophe on Long-Run Economic Growth: Evidence From 6,700 Cyclones," NBER Working Papers 20352, National Bureau of Economic Research, Inc.
    35. Valerie A. Ramey & Sarah Zubairy, 2018. "Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 850-901.
    36. Wataru Miyamoto & Thuy Lan Nguyen & Dmitriy Sergeyev, 2018. "Government Spending Multipliers under the Zero Lower Bound: Evidence from Japan," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(3), pages 247-277, July.
    37. Chirok Han & Peter C. B. Phillips & Donggyu Sul, 2017. "Lag length selection in panel autoregression," Econometric Reviews, Taylor & Francis Journals, vol. 36(1-3), pages 225-240, March.
    38. Barakchian, S. Mahdi & Crowe, Christopher, 2013. "Monetary policy matters: Evidence from new shocks data," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 950-966.
    39. Christina D. Romer & David H. Romer, 2017. "New Evidence on the Aftermath of Financial Crises in Advanced Countries," American Economic Review, American Economic Association, vol. 107(10), pages 3072-3118, October.
    40. Mikkel Plagborg‐Møller & Christian K. Wolf, 2021. "Local Projections and VARs Estimate the Same Impulse Responses," Econometrica, Econometric Society, vol. 89(2), pages 955-980, March.
    41. Pao-Li Chang & Shinichi Sakata, 2007. "Estimation of impulse response functions using long autoregression," Econometrics Journal, Royal Economic Society, vol. 10(2), pages 453-469, July.
    42. Christian K. Wolf, 2020. "SVAR (Mis)identification and the Real Effects of Monetary Policy Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(4), pages 1-32, October.
    43. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-247, February.
    44. Poskitt, D.S., 1994. "A Note on Autoregressive Modeling," Econometric Theory, Cambridge University Press, vol. 10(5), pages 884-899, December.
    Full references (including those not matched with items on IDEAS)

    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. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    2. Alloza, Mario & Sanz, Carlos & Gonzalo, Jesús, 2019. "Dynamic Effects of Persistent Shocks," UC3M Working papers. Economics 29187, Universidad Carlos III de Madrid. Departamento de Economía.
    3. Mikkel Plagborg‐Møller & Christian K. Wolf, 2021. "Local Projections and VARs Estimate the Same Impulse Responses," Econometrica, Econometric Society, vol. 89(2), pages 955-980, March.
    4. Thore Schlaak & Malte Rieth & Maximilian Podstawski, 2023. "Monetary policy, external instruments, and heteroskedasticity," Quantitative Economics, Econometric Society, vol. 14(1), pages 161-200, January.
    5. Dake Li & Mikkel Plagborg-M{o}ller & Christian K. Wolf, 2021. "Local Projections vs. VARs: Lessons From Thousands of DGPs," Papers 2104.00655, arXiv.org, revised Jan 2024.
    6. Mikkel Plagborg-Møller & Christian K. Wolf, 2022. "Instrumental Variable Identification of Dynamic Variance Decompositions," Journal of Political Economy, University of Chicago Press, vol. 130(8), pages 2164-2202.
    7. Gorodnichenko, Yuriy & Lee, Byoungchan, 2017. "A Note on Variance Decomposition with Local Projections," Department of Economics, Working Paper Series qt8878h9r2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    8. Herwartz, Helmut & Rohloff, Hannes & Wang, Shu, 2022. "Proxy SVAR identification of monetary policy shocks - Monte Carlo evidence and insights for the US," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    9. Ashesh Rambachan & Neil Shephard, 2019. "Econometric analysis of potential outcomes time series: instruments, shocks, linearity and the causal response function," Papers 1903.01637, arXiv.org, revised Feb 2020.
    10. Syed M. Hussain & Lin Liu, 2024. "Macroeconomic effects of discretionary tax changes in Canada: Evidence from a new narrative measure of tax shocks," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(1), pages 78-107, February.
    11. Miranda-Agrippino, Silvia & Ricco, Giovanni, 2023. "Identification with External Instruments in Structural VARs," Journal of Monetary Economics, Elsevier, vol. 135(C), pages 1-19.
    12. Danilo Cascaldi-Garcia, 2022. "Forecast Revisions as Instruments for News Shocks," International Finance Discussion Papers 1341, Board of Governors of the Federal Reserve System (U.S.).
    13. Oscar Jorda & Alan Taylor & Sanjay Singh, 2019. "The Long-Run Effects of Monetary Policy," 2019 Meeting Papers 1307, Society for Economic Dynamics.
    14. Guido Ascari & Timo Haber, 2019. "Sticky prices and the transmission mechanism of monetary policy: A minimal test of New Keynesian models," Economics Series Working Papers 869, University of Oxford, Department of Economics.
    15. James Cloyne & Patrick Hürtgen, 2016. "The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 75-102, October.
    16. Albrizio, Silvia & Choi, Sangyup & Furceri, Davide & Yoon, Chansik, 2020. "International bank lending channel of monetary policy," Journal of International Money and Finance, Elsevier, vol. 102(C).
    17. Michele Piffer & Maximilian Podstawski, 2018. "Identifying Uncertainty Shocks Using the Price of Gold," Economic Journal, Royal Economic Society, vol. 128(616), pages 3266-3284, December.
    18. Ferreira, Leonardo N., 2022. "Forward guidance matters: Disentangling monetary policy shocks," Journal of Macroeconomics, Elsevier, vol. 73(C).
    19. Gonçalves, Sílvia & Herrera, Ana María & Kilian, Lutz & Pesavento, Elena, 2021. "Impulse response analysis for structural dynamic models with nonlinear regressors," Journal of Econometrics, Elsevier, vol. 225(1), pages 107-130.
    20. Nadav Ben Zeev, 2019. "Is There A Single Shock That Drives The Majority Of Business Cycle Fluctuations?," Working Papers 1906, Ben-Gurion University of the Negev, Department of Economics.

    More about this item

    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:bla:obuest:v:84:y:2022:i:5:p:1101-1122. 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: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/sfeixuk.html .

    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.