We study the reliability of the estimated responses of major economic aggregates to monetary policy shocks. We investigate the bias of the estimated impulse response functions and the reliability of their qualitative features such as their sign and shape and the timing of peaks and troughs. We also study the coverage accuracy of the corresponding pointwise confidence intervals. This simulation study is the first of its kind to focus on large-dimensional VAR models with many lags. Our data generating processes are based on VAR models estimated by leading practitioners in the field. In contrast, existing studies have largely focused on artificial bivariate VAR(1) models without economic interpretation. We find that in general qualitative features of impulse response functions are not estimated reliably. There are only minor differences in coverage accuracy between the intervals proposed by Kilian (1998a) and Sims and Zha (1995). Both intervals tend to be more accurate than the asymptotic delta method, but somewhat erratic. Poor coverage accuracy is associated with bias in the impulse response point estimates. In particular, impulse response point estimates and confidence intervals both tend to understate systematically the magnitude of the true output response to a monetary tightening.
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Paper provided by Michigan - Center for Research on Economic & Social Theory in its series Papers with number
98-06.
Length: 27 pages Date of creation: 1998 Date of revision: Handle: RePEc:fth:michet:98-06
Contact details of provider: Postal: UNIVERSITY OF MICHIGAN, DEPARTMENT OF ECONOMICS CENTER FOR RESEARCH ON ECONOMIC AND SOCIAL THEORY, ANN ARBOR MICHIGAN U.S.A.
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Find related papers by JEL classification: C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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