A0165
Title: Generalized impulse responses, multi-horizon projections, and causal mediation analysis in macroeconomics and finance
Authors: Jean-Marie Dufour - McGill University (Canada) [presenting]
Abstract: A novel concept of impulse response decomposition is introduced to disentangle the dynamic contributions of the mediator variables in the transmission of structural shocks. The decomposition is justified by drawing on causal mediation analysis and demonstrating its equivalence to the average mediation effect. The result establishes a formal link between Sims and Granger causality. Sims causality captures the total effect, while Granger causality corresponds to the mediation effect. A dynamic mediation index that quantifies the evolving role of mediator variables in shock propagation is constructed. Applying the framework to studies of the transmission channels of U.S. monetary policy, it is found that investor sentiment explains approximately 60 percent of the peak output response in three months following a contractionary policy shock, while expected default risk contributes negligibly across all horizons.
