A0693
Title: Big vs small monetary policy interventions: A novel approach to nonlinear local projections
Authors: Luca Gambetti - UAB (Spain) [presenting]
Giovanni Ricco - University of Warwick (United Kingdom)
Mario Forni - Universita degli Studi di Modena e Reggio Emilia (Italy)
Abstract: When the local projection (LP) equations include nonlinear functions of the shock of interest (the nonlinear LP), the impulse response functions estimated using a noisy measure of the shock (instrument or proxy) are distorted. The distortion cannot be eliminated, in general, as in the linear LP, using LP-IV. A solution to this problem is proposed. Under relatively general assumptions, the shock can be estimated as the fitted value of the projection of the instrument onto current and future values of the residuals of a VAR estimated with the set of relevant variables. The estimated shock and its nonlinear functions can then be used as regressors in the LP equations. In the application, it is shown that the effects of US monetary policy shocks on real activity variables increase with the magnitude of the shock, while no size asymmetry is found for prices. The evidence calls for a small tightening to control inflation but a large easing to stimulate the economy.
