VAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income Countries
VAR methods suggest that the monetary transmission mechanism may be weak and unreliable in low-income countries (LICs). But are structural VARs identified via shortrun restrictions capable of detecting a transmission mechanism when one exists, under research conditions typical of these countries? Us...
| Main Authors: | , , , , |
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| Format: | Journal article |
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International Monetary Fund
2016
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| _version_ | 1797085072130572288 |
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| author | Li, B O'Connell, S Adam, C Berg, A Montiel, P |
| author_facet | Li, B O'Connell, S Adam, C Berg, A Montiel, P |
| author_sort | Li, B |
| collection | OXFORD |
| description | VAR methods suggest that the monetary transmission mechanism may be weak and unreliable in low-income countries (LICs). But are structural VARs identified via shortrun restrictions capable of detecting a transmission mechanism when one exists, under research conditions typical of these countries? Using small DSGEs as data-generating processes, we assess the impact on VAR-based inference of short data samples, measurement error, high-frequency supply shocks, and other features of the LIC environment. The impact of these features on finite-sample bias appears to be relatively modest when identification is valid—a strong caveat, especially in LICs. However, many of these features undermine the precision of estimated impulse responses to monetary policy shocks, and cumulatively they suggest that “insignificant” results can be expected even when the underlying transmission mechanism is strong. |
| first_indexed | 2024-03-07T02:03:57Z |
| format | Journal article |
| id | oxford-uuid:9e51e691-0fcf-4864-831a-c10705a043ac |
| institution | University of Oxford |
| last_indexed | 2024-03-07T02:03:57Z |
| publishDate | 2016 |
| publisher | International Monetary Fund |
| record_format | dspace |
| spelling | oxford-uuid:9e51e691-0fcf-4864-831a-c10705a043ac2022-03-27T00:49:21ZVAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income CountriesJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:9e51e691-0fcf-4864-831a-c10705a043acSymplectic Elements at OxfordInternational Monetary Fund2016Li, BO'Connell, SAdam, CBerg, AMontiel, PVAR methods suggest that the monetary transmission mechanism may be weak and unreliable in low-income countries (LICs). But are structural VARs identified via shortrun restrictions capable of detecting a transmission mechanism when one exists, under research conditions typical of these countries? Using small DSGEs as data-generating processes, we assess the impact on VAR-based inference of short data samples, measurement error, high-frequency supply shocks, and other features of the LIC environment. The impact of these features on finite-sample bias appears to be relatively modest when identification is valid—a strong caveat, especially in LICs. However, many of these features undermine the precision of estimated impulse responses to monetary policy shocks, and cumulatively they suggest that “insignificant” results can be expected even when the underlying transmission mechanism is strong. |
| spellingShingle | Li, B O'Connell, S Adam, C Berg, A Montiel, P VAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income Countries |
| title | VAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income Countries |
| title_full | VAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income Countries |
| title_fullStr | VAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income Countries |
| title_full_unstemmed | VAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income Countries |
| title_short | VAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income Countries |
| title_sort | var meets dsge uncovering the monetary transmission mechanism in low income countries |
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