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Dynamic effects of persistent shocks

Author

Listed:
  • Mario Alloza

    (Banco de España)

  • Jesús Gonzalo

    (Universidad Carlos III de Madrid)

  • Carlos Sanz

    (Banco de España)

Abstract
We show that several shocks identified without restrictions from a model, and frequently used in the empirical literature, display some persistence. We demonstrate that the two leading methods to recover impulse responses to shocks (moving average representations and local projections) treat persistence differently, hence identifying different objects. In particular, standard local projections identify responses that include an effect due to the persistence of the shock, while moving average representations implicitly account for it. We propose methods to re-establish the equivalence between local projections and moving average representations. In particular, the inclusion of leads of the shock in local projections allows to control for its persistence and renders the resulting responses equivalent to those associated to counterfactual non-serially correlated shocks. We apply this method to well-known empirical work on fiscal and monetary policy and find that accounting for persistence has a sizable impact on the estimates of dynamic effects.

Suggested Citation

  • Mario Alloza & Jesús Gonzalo & Carlos Sanz, 2019. "Dynamic effects of persistent shocks," Working Papers 1944, Banco de España.
    • Handle: RePEc:bde:wpaper:1944
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    References listed on IDEAS

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    2. Ochs, A. C.R., 2021. "A New Monetary Policy Shock with Text Analysis," Cambridge Working Papers in Economics 2148, Faculty of Economics, University of Cambridge.
    3. Ghassibe, Mishel, 2021. "Monetary policy and production networks: an empirical investigation," Journal of Monetary Economics, Elsevier, vol. 119(C), pages 21-39.
    4. Gonçalves, Sílvia & Herrera, Ana María & Kilian, Lutz & Pesavento, Elena, 2021. "Impulse response analysis for structural dynamic models with nonlinear regressors," Journal of Econometrics, Elsevier, vol. 225(1), pages 107-130.
    5. James Graham & Alistair Read, 2023. "House Prices, Monetary Policy and Commodities: Evidence from Australia," The Economic Record, The Economic Society of Australia, vol. 99(324), pages 1-31, March.
    6. Mikkel Plagborg‐Møller & Christian K. Wolf, 2021. "Local Projections and VARs Estimate the Same Impulse Responses," Econometrica, Econometric Society, vol. 89(2), pages 955-980, March.
    7. Tobias Adrian & Gaston Gelos & Nora Lamersdorf & Emanuel Moench, 2024. "The asymmetric and persistent effects of Fed policy on global bond yields," BIS Working Papers 1195, Bank for International Settlements.
    8. Dennis Bonam & Paul Konietschke, 2020. "Tax multipliers across the business cycle," Working Papers 699, DNB.
    9. Raphaelle G. Coulombe & Akhil Rao, 2023. "Fires and Local Labor Markets," Papers 2308.02739, arXiv.org.
    10. Valerie A. Ramey, 2020. "Comment on "What Do We Learn From Cross-Regional Empirical Estimates in Macroeconomics?"," NBER Chapters, in: NBER Macroeconomics Annual 2020, volume 35, pages 232-241, National Bureau of Economic Research, Inc.
    11. Roben Kloosterman & Dennis Bonam & Koen van der Veer, 2022. "The effects of monetary policy across fiscal regimes," Working Papers 755, DNB.

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    More about this item

    Keywords

    impulse response function; local projection; shock; fiscal policy; monetary policy;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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