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Local linear impulse responses for a small open economy

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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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2007/09.

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Length: 38 p.
Date of creation: Apr 2007
Date of revision:
Handle: RePEc:nzb:nzbdps:2007/09
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