IMF Working Papers

IMF Working Papers
Journal
Publisher:
International Monetary Fund
ISSN:
1018-5941
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. With nearly 300 released each year, working papers cover a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
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VAR meets DSGE : Uncovering the Monetary Transmission Mechanism in Low-Income Countries

VAR meets DSGE : Uncovering the Monetary Transmission Mechanism in Low-Income Countries
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Journal Issue
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Volume/Issue:
2016/90
Series:
IMF Working Papers
Author(s):
Bin Grace Li, Stephen O'Connell, Christopher Adam, Andrew Berg, and Peter Montiel
Publisher:
INTERNATIONAL MONETARY FUND
Published Date:
April 2016
DOI:
http://dx.doi.org/10.5089/9781484324752.001
ISBN:
9781484324752
ISSN:
1018-5941
Page:
45
VAR methods suggest that the monetary transmission mechanism may be weak and unreliable in low-income countries (LICs). But are structural VARs identified via short-run restrictions capable of detecting a transmission mechanism when one exists, under research conditions typical of these countries? Using small DSGEs as data-generating processes, we assess the impact on VAR-based inference of short data samples, measurement error, high-frequency supply shocks, and other features of the LIC environment. The impact of these features on finite-sample bias appears to be relatively modest when identification is valid-a strong caveat, especially in LICs. However, many of these features undermine the precision of estimated impulse responses to monetary policy shocks, and cumulatively they suggest that 'insignificant' results can be expected even when the underlying transmission mechanism is strong.
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