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Local Linear Impulse Responses for a Small Open Economy *
Author(s) -
Haug Alfred A.,
Smith Christie
Publication year - 2012
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2011.00643.x
Subject(s) - impulse response , econometrics , monte carlo method , small open economy , curse of dimensionality , economics , impulse (physics) , monetary policy , computer science , mathematics , macroeconomics , statistics , artificial intelligence , mathematical analysis , physics , quantum mechanics
Traditional vector autoregressions derive impulse responses using iterative techniques that may compound specification errors. Local projection techniques are more robust to this problem, and Monte Carlo evidence has suggested 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 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 gross domestic product, interest rates, prices and exchange rates.