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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.

Monetary policy --- Transmission mechanism (Monetary policy) --- Econometric models. --- Monetary transmission mechanism --- Agriculture: Aggregate Supply and Demand Analysis --- Computable and Other Applied General Equilibrium Models --- Diffusion Processes --- Dynamic Quantile Regressions --- Dynamic stochastic general equilibrium models --- Dynamic Treatment Effect Models --- Econometric analysis --- Econometric models --- Econometrics & economic statistics --- Econometrics --- Economic theory & philosophy --- Economic Theory --- Economic theory --- Environment --- Environmental Economics --- Environmental economics --- Environmental Economics: General --- Environmental sciences --- Fiscal and Monetary Policy in Development --- Macroeconomic Analyses of Economic Development --- Monetary Policy --- Money and Interest Rates: Forecasting and Simulation --- Prices --- State Space Models --- Structural vector autoregression --- Supply and demand --- Supply shocks --- Time-Series Models --- Vector autoregression --- Kenya