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Impulse Response Functions for Self-Exciting Nonlinear Models

Author

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  • Neville Francis
  • Michael T. Owyang
  • Daniel Soques

Abstract

We calculate impulse response functions from regime-switching models where the driving variable can respond to the shock. Two methods used to estimate the impulse responses in these models are generalized impulse response functions and local projections. Local projections depend on the observed switches in the data, while generalized impulse response functions rely on correctly specifying regime process. Using Monte Carlos with different misspecifications, we determine under what conditions either method is preferred. We then extend model-average impulse responses to this nonlinear environment and show that they generally perform better than either generalized impulse response functions and local projections. Finally, we apply these findings to the empirical estimation of regime-dependent fiscal multipliers and find multipliers less than one and generally small differences across different states of slack.

Suggested Citation

  • Neville Francis & Michael T. Owyang & Daniel Soques, 2023. "Impulse Response Functions for Self-Exciting Nonlinear Models," Working Papers 2023-021, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:96679
    DOI: 10.20955/wp.2023.021
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    Cited by:

    1. De Santis, Roberto A. & Tornese, Tommaso, 2024. "US monetary policy is more powerful in low economic growth regimes," Working Paper Series 2919, European Central Bank.

    More about this item

    Keywords

    generalized impulse response functions; local projections; threshold models; model averaging;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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