Local linear impulse responses for a small open economy
Smith, Christie; Haug, Alfred A.
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 effects of policy on GDP, interest rates, prices and exchange rates.
Publisher: University of Otago
Series number: 707
Keywords: Local linear projection-based impulse responses; structural identification for New Zealand.
Research Type: Discussion Paper
JEL Classification: C51, E52, F41