Authors: Josef Ruzicka (Assistant professor at Nazarbayev University)
Abstract: Standard impulse response functions measure the average effect of a shock on a response variable. However, different parts of the distribution of the response variable may react to the shock differently. A popular method to capture this heterogeneity are quantile regression local projections. We identify them by short-run restrictions or external instruments, and we establish their asymptotics. To overcome their excessive volatility, we introduce two novel smoothing estimators. We propose information criteria for optimal smoothing and apply the estimators to shocks in financial conditions and monetary policy. We show that financial conditions affect the entire distribution of GDP growth and not just its lower part. Thus, financial conditions matter not only for recessions, but also during normal times and even in recovery periods. We also find that conventional monetary policy is more effective at curbing inflation than at generating it.
Abstract: Standard impulse response functions measure the average effect of a shock on a response variable. However, different parts of the distribution of the response variable may react to the shock differently. A popular method to capture this heterogeneity are quantile regression local projections. We identify them by short-run restrictions or external instruments, and we establish their asymptotics. To overcome their excessive volatility, we introduce two novel smoothing estimators. We propose information criteria for optimal smoothing and apply the estimators to shocks in financial conditions and monetary policy. We show that financial conditions affect the entire distribution of GDP growth and not just its lower part. Thus, financial conditions matter not only for recessions, but also during normal times and even in recovery periods. We also find that conventional monetary policy is more effective at curbing inflation than at generating it.