About Local Projection Impulse Responde Function Reliability

Brugnolini Luca
CEIS Research Paper
I compare the performance of the vector autoregressive (VAR) model impulse response function estimator with the Jordà (2005) local projection (LP) methodology. In a Monte Carlo experiment, I demonstrate that when the data generating process is a well-specified VAR, the standard impulse response function estimator is the best option. However, when the sample size is small, and the model lag-length is misspecified, I prove that the local projection estimator is a competitive alternative. Finally, I show how to improve the local projection performance by fixing the lag-length at each horizon.

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Number: 440
Keywords: VAR,information criteria,lag-length,Monte Carlo
JEL codes: C32,C52,C53,E52
Volume: 16
Issue: 6
Date: Thursday, August 9, 2018
Revision Date: Thursday, August 9, 2018