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IS ECONOMIC RECOVERY A MYTH? ROBUST ESTIMATION OF IMPULSE RESPONSES
Author(s) -
Teulings Coen N.,
Zubanov Nikolay
Publication year - 2013
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2333
Subject(s) - estimator , impulse response , econometrics , economics , extension (predicate logic) , estimation , impulse (physics) , computer science , mathematics , statistics , physics , mathematical analysis , management , quantum mechanics , programming language
SUMMARY We estimate the impulse response function (IRF) of GDP to a banking crisis using an extension of the local projections method. We demonstrate that, though robust to misspecifications of the data‐generating process, this method suffers from a hitherto unnoticed bias which increases with the forecast horizon. We propose a correction to this bias and show through simulations that it works well. Applying our corrected local projections estimator to the data from a panel of 99 countries observed between 1974 and 2001, we find that an average banking crisis yields a GDP loss of just under 10% in 10 years, with little sign of recovery. Like the original local projections method, our extension of it is widely applicable. Copyright © 2013 John Wiley & Sons, Ltd.