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How Reliable Are VAR Estimates of Responses to Monetary bPolicy Shocks?

Author

Listed:
  • Kilian, L.
  • Chang, P.L.

Abstract

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.

Suggested Citation

  • Kilian, L. & Chang, P.L., 1998. "How Reliable Are VAR Estimates of Responses to Monetary bPolicy Shocks?," Papers 98-06, Michigan - Center for Research on Economic & Social Theory.
  • Handle: RePEc:fth:michet:98-06
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    Citations

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    Cited by:

    1. Monticello, Carlo & Tristani, Oreste, 1999. "What does the single monetary policy do? A SVAR benchmark for the European Central Bank," Working Paper Series 0002, European Central Bank.
    2. Faust, Jon & Rogers, John H., 2003. "Monetary policy's role in exchange rate behavior," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1403-1424, October.

    More about this item

    Keywords

    SAMPLING ; EVALUATION ; VARIABLES;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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