Economics Dictionary of ArgumentsHome
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| Impulse Response Functions: Impulse Response Functions (IRFs) in economics illustrate how a system's variables react over time to a one-time, unexpected "shock" or "impulse" in one of its variables. They are crucial for understanding the dynamic effects of policy changes or other disturbances on macroeconomic variables like output, inflation, or interest rates, often within Vector Autoregressive (VAR) models. See also Markets, Macroeconomics, Trade, International trade, Market imperfections._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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IMF Working Papers on Impulse Response Functions - Dictionary of Arguments
Ostry I 4 Impulse Response Function/Furceri/Hannan/Ostry/Rose: We rely on Jorda’s (2005)(1) celebrated local projection method to estimate impulse response functions, allowing us as to account flexibly for non-linearities without imposing potentially inappropriate dynamic restrictions.(2) >Tariffs, >Method/Ostry. Ostry I 9 (…) we use the well-known local projection method - “LPM” henceforth (Jordà, 2005)(1) - to estimate impulse-response functions. Ostry I 10 This approach has been advocated by Stock and Watson (2007)(3) and Auerbach and Gorodnichenko (2013)(4), among others, as a flexible choice that does not impose the dynamic restrictions embedded In models like vector autoregressions or autoregressive-distributed lag specifications; it is particularly suited to estimating nonlinearities in the dynamic responses. The baseline regression is specified as follows: yi,t+k - yi,t-1 = αi + γt + βΔTi,t + νXi,t + εi,t where: • yi,t+k is the outcome variable of interest (log of output, productivity, unemployment rate, Gini coefficient, log real exchange rate, or trade balance/GDP) for country i at time t+k, • {αi} are country fixed effects to control for unobserved cross-country heterogeneity, • {γt} are time fixed effects to control for global shocks, • ∆Ti,k is the change in the tariff rate, • ν is a vector of nuisance coefficients • Xi,t is a vector of control variables, including two lags of each of: a) changes in the dependent variable, b) the tariff, c) log output, d) the log of real exchange rates and d) the trade balance in percent of GDP, and • ε is an unexplained (hopefully well-behaved) residual. Ostry I 11 The coefficients of greatest interest to us are {β}, the impulse responses of our variables of interest to changes in the tariff rate.(5) >Tariffs/Ostry, >Method/Ostry, >Tariff impacts, >Tariff responsivity. 1. Jordà, Oscar, 2005, “Estimation and Inference of Impulse Responses by Local Projections,” American Economic Review, vol. 95(1), pp. 161-182. 2. We also try to account for potential endogeneity via an instrumental variable strategy, using changes in tariffs in major large trading partners to create instruments. 3. Stock, James, and Mark Watson, “Why Has U.S. Inflation Become Harder to Forecast?” Journal of Money, Banking and Credit, vol. 39(1), pp. 3-33. 4. Auerbach, Alan J., and Yuriy Gorodnichenko, 2013, “Output Spillovers from Fiscal Policy,” American Economic Review: Papers and Proceedings, vol. 103(3), pp. 141-146. 5. Since the set of control variables includes lags of output growth as well as the real exchange rate and trade balance, this approach is equivalent to a VAR approach in which tariff shocks do not respond to shocks in other variables within a year. We relax this assumption later as a robustness check._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
IMF Working Papers Ostry I Jonathan D. Ostry Davide Furceri Andrew K. Rose, Macroeconomic Consequences of Tariffs. IMF Working Paper. WP/19/9.International Monetary Fund. Washington, D.C. 2019 |
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