IS ECONOMIC RECOVERY A MYTH? ROBUST ESTIMATION OF IMPULSE RESPONSES
Article first published online: 20 JUN 2013
Copyright © 2013 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 29, Issue 3, pages 497–514, April/May 2014
How to Cite
Teulings, C. N. and Zubanov, N. (2014), IS ECONOMIC RECOVERY A MYTH? ROBUST ESTIMATION OF IMPULSE RESPONSES. J. Appl. Econ., 29: 497–514. doi: 10.1002/jae.2333
- Issue published online: 2 APR 2014
- Article first published online: 20 JUN 2013
- Manuscript Revised: 30 DEC 2012
- Manuscript Received: 11 JUL 2011
We estimate the impulse response function (IRF) of GDP to a banking crisis using an extension of the local projections method. We demonstrate that, though robust to misspecifications of the data-generating process, this method suffers from a hitherto unnoticed bias which increases with the forecast horizon. We propose a correction to this bias and show through simulations that it works well. Applying our corrected local projections estimator to the data from a panel of 99 countries observed between 1974 and 2001, we find that an average banking crisis yields a GDP loss of just under 10% in 10 years, with little sign of recovery. Like the original local projections method, our extension of it is widely applicable. Copyright © 2013 John Wiley & Sons, Ltd.