Impulse Response Estimation by Smooth Local Projections
20 Pages Posted: 4 Jan 2017 Last revised: 10 May 2018
Date Written: May 4, 2018
Local Projections (LP) is a popular methodology for the estimation of Impulse Responses (IR). Compared to the traditional VAR approach, LP allow for more flexible IR estimation by imposing weaker assumptions on the dynamics of the data. The nonparametric nature of LP comes at an efficiency cost and in practice the LP estimator may suffer from excessive variability. In this work we propose an IR estimation methodology based on B-spline smoothing called Smooth Local Projections (SLP). The SLP approach preserves the flexibility of standard LP, can substantially increase precision and is straightforward to implement. A simulation study shows that SLP can deliver substantial gains in IR estimation over LP. We illustrate our technique by studying the effects of monetary shocks where we highlight how SLP can easily incorporate commonly employed structural identification strategies.
Keywords: local projections, semiparametric estimation, structural impulse response
JEL Classification: C14, C32, C53, E52
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