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.