Estimated Impulse Response Functions Research Articles

Random Subspace Local Projections

Abstract We show how random subspace methods can be adapted to estimating local projections with many controls. Random subspace methods have their roots in the machine learning literature and are implemented by averaging over regressions estimated over different combinations of subsets of these controls. We document three key results: (i) Our approach can successfully recover the impulse response functions across Monte Carlo experiments representative of different macroeconomic settings and identification schemes. (ii) Our results suggest that random subspace methods are more accurate than other dimension reduction methods if the underlying large dataset has a factor structure similar to typical macroeconomic datasets such as FRED-MD. (iii) Our approach leads to differences in the estimated impulse response functions relative to benchmark methods when applied to two widely studied empirical applications.

Oil jump tail risk as a driver of inflation dynamics

In this paper, we look at the role of various oil jump tail risk measures as drivers of both U.S. headline and core inflation. Those measures are first computed from high-frequency oil future prices and are then introduced into standard regression models in order to (i) assess in-sample determinants of inflation, (ii) assess overtime the evolution of inflation drivers, (iii) estimate impulse response functions and (iv) forecast inflation out-of-sample for various horizons. Empirical results suggest that oil jump tail risk measures contain useful information to describe inflation dynamics, generally leading to upward inflationary pressures. Even after controlling from standard variables involved in a Phillips curve, goodness-of-fit measures show evidence of a gain, in particular for headline inflation. Overall, we observe that oil jump tail risk measures are contributing more to inflation dynamics since the Covid-19 crisis.

On the robustness of the relationship between tax progressivity, growth, and inequality in the US

We investigate the impact of a shock in tax progressivity on GDP growth and income inequality in the US between 1969 and 2016. Employing various robustness tests, including different imputation methods for the progressivity index, as well as utilizing Vector Autoregressive and Linear Projection models for estimating impulse response functions, we find that both GDP growth and inequality decline in response to more tax progressivity. Nevertheless, only the effect on inequality remains statistically significant across our battery of robustness exercises, while the negative effect on GDP growth is robustly significant only prior to the Great Recession in 2008.

US fiscal policy shocks: Proxy‐SVAR overidentification via GMM

SummaryUsing external instruments, one can recover the effects of individual shocks without fully identifying a vector autoregression (VAR). We show that fully or almost fully instrumenting a VAR—that is, using an instrument for each shock—allows one to overidentify the model by incorporating the condition that the structural shocks are uncorrelated, via the generalized method of moments (GMM). We apply our approach to a fiscal VAR for the United States over 1948–2019, where the overidentifying restrictions are not rejected. The overidentified structural vector autoregression (SVAR) yields (a) greater precision in estimating impulse response functions and multipliers and (b) measures of the effects of nonfiscal shocks even when there is no instrument for them.

Monetary policy models: lessons from the Eurozone crisis

This paper theoretically and empirically investigates the puzzling decade-long concurrence of expansionary monetary and fiscal policies, decreasing credit flows, fall in price levels, and sluggish real activity observed in the Euro area from the outset of the 2007–2008 financial crisis. To this end, we propose a monetary general equilibrium model that clarifies the transmission mechanisms, debt–deflation channels, and the paramount role of financial leverage decisions underlying these peculiarities. On this basis, a vector error correction model is specified which confirms the theoretical predictions and provides insights into the elements specific to the long-term relations. In addition, the estimated impulse response functions document the associated short-term dynamics outlining the debt–deflation mechanism.

Resilience to extreme weather events and local financial structure of prefecture-level cities in China

We study the local economic impacts of extreme weather events and the role of local finance in economic resilience. We use data on the physical intensities of extreme wind and precipitation events for 284 prefecture-level cities in China between 2004 and 2013. We estimate impulse response functions using a bias-corrected method of moments estimator to capture the dynamic responses of affected cities up to 5 years after such events. We find that extreme precipitation events depress the growth of local GDP per capita for multiple years, while the negative effects of storms vanish after the first year. We then use this model to measure the economic resilience of cities to extreme weather events. Regressions of economic resilience on indicators of the local financial structure suggest that cities with higher levels of debt are less resilient. Moreover, the presence of state-owned commercial banks appears to be instrumental to regional economic resilience. As extreme weather events are expected to become more frequent and severe due to climate change, our results inform the emerging debate about regional economic resilience to weather-related shocks.

A new look to the tourism and economic growth nexus: A clustering and panel causality analysis

AbstractThis paper explores the dynamic relationship between tourism and economic growth using panel data for 144 countries over the period 1995–2019. The study was carried out in two steps. First, the set of countries was classified by considering simultaneously two criteria, tourism and the economic development of the countries over time. Two classifications of homogeneous countries with four clusters each are obtained using a non‐parametric methodology and two tourism indicators. Second, the Granger causality was tested for each of the identified groups and the entire sample. The results determined that there were significant differences between clusters and that causality from tourism to economic growth could only be verified for the group of countries with low income and low tourism. This relationship was confirmed by estimating impulse response functions, which showed a positive response of economic growth to innovations in tourism. The tourism sector could, therefore, be a way out of poverty and generate development and prosperity in low‐income countries that are in the early stages of tourism development.

Debt and real interest rates: Evidence from G20 countries

AbstractIn this article, we examine the relationship between the debt and the ex‐post real interest rate on the basis of a sample from the G20 with the panel analysis, the panel threshold model, and a panel VAR model, particularly during times of high debt levels. In contrast to the results from the previous literature, our estimates suggest the negative connections between debt levels and real rates of interest: high debt levels reduce the current and expected real rate of interest, and the low real interest rate would raise the current and forward‐looking debt levels. Further investigations using the panel threshold model identify and quantify threshold values of debt on the forward real interest rate. In addition, we find that the threshold values of debt levels for advanced countries are far higher than the relevant values for emerging countries, which confirms the theory of “debt intolerance.” Third, the estimated impulse response functions from the panel VAR simulation support the significantly negative associations between debt levels and real interest rates. Fourth, the system GMM regressions and dynamic panel threshold tests show that our above conclusions are robust.

Public debt and state-dependent effects of fiscal policy in the euro area

We investigate public debt related state dependencies of fiscal policy shocks for fifteen euro area economies during the period from 2000:Q1 to 2019:Q4. Our estimated impulse response functions suggest that the impact of fiscal policy shocks varies depending on the level of public debt characterizing an economy. Macroeconomic variables, notably output and consumption, go up in response to a positive government spending shock in the high-debt cross-sectional state, and these responses are distinctly different from those in the low-debt state. Using an extended model that considers both cross-sectional and time-serial high- and low-debt states we find that, for euro area economies, cross-sectional debt variation is more important than time-serial debt variation in driving differences in the responses of macroeconomic variables to government spending shocks.

Euro area monetary asset demand and Divisia aggregates**

Monetary asset user costs are functions of spreads between a benchmark rate of return and the own rates of return on the monetary assets. We analyze the impact of the benchmark rate on a Euro area Divisia M2 aggregate, on estimated elasticities of substitution, and on estimated impulse response functions. Substitution in response to changes in the user cost of M1 is generally elastic, but we find evidence of inelastic substitution along other dimensions. When a loan rate is used as the benchmark, substitution in response to changes in the user costs of the two components of M2-M1 is inelastic throughout the sample and the corresponding elasticity estimates are near their lowest levels during the pandemic. This is strong evidence that Divisia monetary aggregates are preferable to conventional monetary aggregates. Annual growth rates of simple sum and Divisia M2 monetary aggregates differ significantly in some periods, but not during the pandemic. Estimated impulse response functions using both Divisia and simple sum money measures indicate that money shocks have positive and statistically significant effects on real output. The response of the price level to a money shock tends to be more persistent when the models are estimated using Divisia aggregates. .

Coalitions in international relations and coordination of agricultural trade policies

PurposeThe author attempts to examine the existence and pattern of coalitions in international relations across countries, and investigates whether international relations of coalition partners influence a country's enaction of agricultural non-tariff measures (NTMs).Design/methodology/approachThe author adopts a machine learning technique to identify international relation coalition partnerships and use network analysis to characterize the clustering pattern of coalitions with high-frequent records of global event data. The author then constructs a monthly dataset of agricultural NTMs against China and international relations with China of each importer and its coalition partners, and designs a panel structural vector autoregressive (PSVAR) model to estimate impulse response functions of agricultural NTMs with regard to international relation shocks.FindingsThe author finds countries to establish coalition partnerships. Two major clusters of coalitions are noted, with one composed of coalitions primarily among “North” countries and the other of coalitions among “South” countries. The United States is found to play a pivotal role by connecting the two clusters. The PSVAR estimation reveals reductions of NTMs against China following improved international relations with China of both the importer and its coalition partners. NTM responses are more substantial for measures that are trade restrictive. These results confirm that coalitions in international relations lead to coordination of agricultural NTMs.Originality/valueThe author provides international political insights into agricultural trade policymaking by showing interactions of NTM enaction across countries in the same coalition of international relations. These insights offer useful policy implications to predict and cope with hidden barriers to agricultural trade.

Comparative effect of short-term credit granted to agriculture on agricultural added value in the West African countries

PurposeThe paper analyzes the response of agricultural value added to credit and real interest rate shocks in the West African Economic and Monetary Union (WAEMU) and make a short-term comparative effect analysis of credit granted to the agricultural sector on agricultural value added among member countries.Design/methodology/approachFirst, in order to estimate impulse response functions (IRFs) and study shocks, a panel VAR model is used. Second the paper uses an autoregressive distributed lag (ARDL) model with the associated error correction model to make a comparative analysis of the effect of agricultural credit on agricultural value added in the WAEMU.FindingsResults shows that: (1) credit stimulates agricultural value added only in the medium and long term; (2) in the case of WAEMU, credit only becomes a means of lifting the constraint of capital underutilization after three years; (3) short-term credit granted to agriculture in WAEMU has a weak and differentiated effect on agricultural value added from one country to another.Practical implicationsIt is imperative to implement a policy of lowering real short-term interest rates. Moreover, a monetary policy that favors direct financing of agriculture to the detriment of that oriented toward market financing is to be prioritized.Originality/valueThe originality of this paper is that it makes the link between macroeconomics and agriculture. It shows how the monetary instrument can be manipulated to improve the performance of agriculture. Actually, in WAEMU, the financing of agriculture is provided by the market. This paper proposes a new approach which is direct financing. The paper offers possibilities for the coordination of agricultural policies in the WAEMU.

The Impact of a Revenue-Neutral Carbon Tax on GDP Dynamics: The Case of British Columbia

We study the impact over time of revenue-neutral-designed carbon taxes on GDP in the Canadian province of British Columbia (B.C.). The tax is broad-based, and all rate hikes and their timings were pre-announced. Our time series approach accounts for these pre-announcement effects, as well as for the possible saliency of the tax. Estimated impulse response functions and statistical comparisons of GDP dynamics in the presence and (counterfactual) absence of carbon taxes lead to the same result. Overall, revenue-neutral carbon taxation has no significant negative impacts on GDP. Our setup also allows us to examine the extent of the carbon tax pass-through into energy prices. We find that pass-through is complete. We conclude that implementing revenue-neutral carbon taxation contributes to lowering harmful greenhouse gases into the atmosphere without hurting the economy.

Conventional Monetary Policy Re-Estimated

We propose a new method of identification of the monetary policy rule. Using this method, we argue that, before the Great Moderation, the Federal Reserve implemented the Friedman policy of steady money growth as could be interpreted and adopted by the policymakers in the 1960s and 1970s. During the Great Moderation, the monetary policy follows the Taylor rule with interest rate smoothing instead, where the type of smoothing is more general than discussed in the literature. The estimated impulse response functions for the monetary policy shock are large and significant, even when they are estimated on the Great Moderation data.

Multiplicadores Fiscais Dependentes do Ciclo Econômico: O que é possível dizer para o Brasil?

Resumo O objetivo deste artigo é investigar se os multiplicadores de gastos do governo diferem de acordo com o estado do ciclo de negócios para o período 1997: T1-2017: T2. Para tanto, é utilizado o Método de Projeção Local de Jordà para estimar as funções-resposta a impulso e os multiplicadores fiscais sob dois regimes diferentes: recessão e expansão. Contrariamente ao resultado mais comum encontrado na literatura, os multiplicadores são maiores nas expansões do que nas contrações, embora a diferença entre ambos não seja estatisticamente significante. Estes resultados são robustos, exceto quando a variável que define o estado da economia é o hiato do produto.

The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States: Comment

Mertens and Ravn (2013) estimate impulse response functions (IRFs) from income tax changes in a structural vector autoregression (SVAR) by using narrative accounts of tax liability changes as proxy variables. To produce confidence intervals for their IRFs, they use a residual-based wild bootstrap, which has subsequently become popular in the proxy SVAR literature. We argue that their wild bootstrap is not valid, producing confidence intervals that are much too small. Using a residual-based moving block bootstrap that is proven to be asymptotically valid, we reestimate confidence intervals for Mertens and Ravn’s (2013) IRFs and find no statistically significant effects of tax changes on output, labor, and investment. (JEL E23, E62, H24, H25, H31, H32)

Estimating impulse response functions when the shock series is observed

We compare the finite sample performance of a variety of consistent approaches to estimating impulse response functions (IRFs) in a linear setup when the shock of interest is observed. Although there is no uniformly superior approach, iterated approaches turn out to perform well in terms of root mean-squared error (RMSE) in diverse environments and sample sizes. For smaller sample sizes, the inclusion of all ‘relevant’ variables is not always desirable.

Estimating Impulse Response Functions When the Shock Series is Observed

We compare the finite sample performance of a variety of consistent approaches to estimating Impulse Response Functions (IRFs) in a linear setup when the shock of interest is observed. Although there is no uniformly superior approach, iterated approaches turn out to perform well in terms of root mean-squared error (RMSE) in diverse environments and sample sizes. For smaller sample sizes, parsimonious specifications are preferred over full specifications with all ‘relevant’ variables.

Macroeconomic Consequences of Tariffs

We study the macroeconomic consequences of tariffs. We estimate impulse response functions from local projections using a panel of annual data that spans 151 countries over 1963-2014. We find that tariff increases lead, in the medium term, to economically and statistically significant declines in domestic output and productivity. Tariff increases also result in more unemployment, higher inequality, and real exchange rate appreciation, but only small effects on the trade balance. The effects on output and productivity tend to be magnified when tariffs rise during expansions, for advanced economies, and when tariffs go up, not down. Our results are robust to a large number of perturbations to our methodology, and we complement our analysis with industry-level data.

Are all types of capital flows driven by the same factors? Evidence from Mexico

In this paper, we analyse the impact and persistence of shocks to global (push) and domestic (pull) factors on each component of the financial account for the Mexican Balance of Payments, at the highest degree of disaggregation, including investment by foreign residents in Mexican public and private sector securities, as well as investment by domestic residents in foreign securities. To this end, we estimate impulse response functions from vector autoregressive models for the period 1995–2015. We find that an increase in the foreign interest rate leads to lower portfolio investment. An increase in global risk generates lower portfolio investment, particularly in private sector securities. Foreign investors respond to a higher extent to foreign interest rate and liquidity shocks compared to domestic investors.