Monday, January 16, 2017
Impulse Responses From Smooth Local Projections
Check out Barnichon-Brownlees (2017) (BB). As proposed and developed in Jorda (2005), they estimate impulse-response functions (IRF's) directly by projecting outcomes on estimates of structural shocks at various horizons, as opposed to inverting a fitted autoregression. The BB enhancement relative to Jorda is the effective incorporation of a smoothness prior in IRF estimation. (Notice that the traditional approach of inverting a low-ordered autoregression automatically promotes IRF smoothness.) In my view, smoothness is a natural IRF shrinkage direction, and BB convincingly show that it's likely to enhance estimation efficiency relative to Jorda's original approach. I always liked the idea of attempting to go after IRF's directly, and Jorda/BB seems appealing.