Structural versus matching estimation: Transmission mechanisms in Armenia

Abstract

Opting for structural or reduced form estimation is often hard to justify if one wants to both learn about the structure of the economy and obtain accurate predictions. In this paper, we show that using both structural and reduced form estimates simultaneously can lead to more accurate policy predictions. Our findings are based on new information criteria that allow us to pick for both estimates impulse responses that are valid and relevant for prediction. We illustrate our findings in the context of analyzing the monetary transmission mechanism for Armenia. Based on picking valid and relevant information from both structural and reduced form matching estimation, our findings suggest that the interest rate targeting and the exchange rate channel are well specified and strongly reinforce each other in promoting the recent double-digit growth Armenia experienced before the crisis.

The copyright to this article is held by Elsevier, Economic Modelling. It may be downloaded, printed and reproduced only for personal or classroom use. Absolutely no downloading or copying may be done for, or on behalf of, any for-profit commercial firm or other commercial purpose.

[Download PDF]