Estimating Impulse Response Functions When the Shock Series Is Observed

Choi, Chi-Young; Chudik, Alexander

doi:10.24149/gwp353

Working Paper

Estimating Impulse Response Functions When the Shock Series Is Observed

Abstract: 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.

Keywords: Observed shock; impulse response functions; Monte Carlo experiments; Finite sample performance;

JEL Classification: C13; C50;

https://doi.org/10.24149/gwp353