Impulse Response Estimation by Smooth Local Projections

20 Pages Posted: 4 Jan 2017 Last revised: 10 May 2018

See all articles by Regis Barnichon

Regis Barnichon

Federal Reserve Bank of San Francisco

Christian T. Brownlees

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE)

Multiple version iconThere are 2 versions of this paper

Date Written: May 4, 2018

Abstract

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

Suggested Citation

Barnichon, Regis and Brownlees, Christian T., Impulse Response Estimation by Smooth Local Projections (May 4, 2018). Available at SSRN: https://ssrn.com/abstract=2892508 or http://dx.doi.org/10.2139/ssrn.2892508

Regis Barnichon

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Christian T. Brownlees (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

HOME PAGE: http://84.89.132.1/~cbrownlees/

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas 25-27
Barcelona, Catalonia 08014
Spain

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
760
Abstract Views
2,489
rank
39,405
PlumX Metrics