Local linear impulse responses for a small open economy

Release date
Alfred A. Haug; Christie Smith
Published as
Haug, Alfred and Christie Smith (2012). ‘Local linear impulse responses for a small open economy’, Oxford Bulletin of Economics and Statistics, University of Oxford, Volume 74(3), Pages 470-492.
Traditional vector autoregressions derive impulse responses using iterative techniques that may compound specification errors. Local projection techniques are robust to this problem, and Monte Carlo evidence suggests 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 local 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 the effects of policy on GDP, interest rates, prices and the exchange rate.