State-dependent local projections

Sílvia Gonçalves, Ana María Herrera, Lutz Kilian, Elena Pesavento

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

Do state-dependent local projections asymptotically recover the population responses of macroeconomic aggregates to structural shocks? The answer to this question depends on how the state of the economy is determined and on the magnitude of the shocks. When the state is exogenous, the local projection estimator recovers the population response regardless of the shock size. When the state depends on macroeconomic shocks, as is common in empirical work, local projections only recover the conditional response to an infinitesimal shock, but not the responses to larger shocks of interest in many applications. Simulations suggest that impulse responses may be off by as much as 82 percent and fiscal multipliers by as much as 40 percent.

Original languageEnglish
Article number105702
JournalJournal of Econometrics
DOIs
StateAccepted/In press - 2024

Bibliographical note

Publisher Copyright:
© 2024

Keywords

  • Business cycle
  • Identification
  • Impulse response
  • Local projection
  • Multiplier
  • Nonlinear structural model
  • Potential outcomes model
  • State-dependence
  • Threshold

ASJC Scopus subject areas

  • Economics and Econometrics
  • Applied Mathematics

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