Econometrics and Finance Seminar: Christian Brownlees

Impulse Response Estimation by Smooth Local Projections

Christian Brownlees, Universitat Pompeu Fabra

(joint with Regis Barnichon)

Vector autoregressions (VAR) and local projections (LP) are well established methodologies for the estimation of impulse responses (IR). These techniques have complementary features: The VAR approach is more efficient when the model is correctly specified whereas the LP approach is less efficient but is more robust to model misspecification. In this work we introduce a methodology for semi-parametric IR estimation called smooth local projections (SLP) that attempts to strike a balance between these two extremes. The procedure consists of using local projections under the constraint that the IR is a smooth function of the forecast horizon. Inference is carried out using semi-parametric techniques based on B-splines. An appealing feature of our framework is that IR estimation comes down to the estimation of an auxiliary linear model via ridge regression. We show how SLP may be used in conjunction with common identification schemes such as timing restrictions and instrumental variables to recover structural IRs. As an illustration, we use our proposed technique to study the effects of monetary policy shocks.