State-dependent local projections

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

doi:10.1016/j.jeconom.2024.105702

State-dependent local projections

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

Economics

Research output: Contribution to journal › Article › peer-review

45 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 language	English
Article number	105702
Journal	Journal of Econometrics
Volume	244
Issue number	2
DOIs	https://doi.org/10.1016/j.jeconom.2024.105702
State	Published - Sep 2024

Bibliographical note

Publisher Copyright:
© 2024

Funding

Acknowledgments: An earlier version of this paper circulated under the title “When do state-dependent local projections work?”. We thank seminar participants at Universidade Católica Portuguesa, Erasmus School of Economics, Cambridge University, University of Glasgow, Universidad Carlos III de Madrid, Emory University, Princeton University, Yale University, University of Victoria, Simon Fraser University, University of Chicago, Toulouse School of Economics, Kansas State University, UC Riverside, University of Illinois Urbana Champaign, and the Federal Reserve Bank of New York, as well as participants at the 3rd Italian Workshop on Econometrics and Empirical Economics, the Société Canadienne de Science Économique 2022, NASMES 2022, NBER Summer Institute 2022, NBER-NSF Time Series 2022, Women in Econometrics, VTSS 2022, MEG 2022, ASSA 2023, CIREQ 2023, IAAE 2023, and ESTE 2023. We also thank Mikkel Plagborg-Møller, Rui Castro, Jeff Racine, David Jacho-Chávez, Pedro Sant'Anna, and the editor for many helpful comments. Julia Koh and Pablo Estrada provided excellent research assistance. This work was supported by an NSERC grant from the government of Canada and a URC grant from Emory University . The views expressed in the paper are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Dallas or the Federal Reserve System. Acknowledgments: An earlier version of this paper circulated under the title “When do state-dependent local projections work?”. We thank seminar participants at Universidade Católica Portuguesa, Erasmus School of Economics, Cambridge University, University of Glasgow, Universidad Carlos III de Madrid, Emory University, Princeton University, Yale University, University of Victoria, Simon Fraser University, University of Chicago, Toulouse School of Economics, Kansas State University, UC Riverside, University of Illinois Urbana Champaign, and the Federal Reserve Bank of New York, as well as participants at the 3rd Italian Workshop of Econometrics and Empirical Economics, the Société Canadienne de Science É conomique 2022, NASMES 2022, NBER Summer Institute 2022, NBER-NSF Time Series 2022, Women in Econometrics, VTSS 2022, MEG 2022, ASSA 2023, CIREQ 2023, IAAE 2023, and ESTE 2023. We also thank Mikkel Plagborg-Møller, Rui Castro, Jeff Racine, David Jacho-Chávez, Pedro Sant’Anna, and the editor for many helpful comments. Julia Koh and Pablo Estrada provided excellent research assistance. This work was supported by an NSERC grant from the government of Canada and a URC grant from Emory University . The views expressed in the paper are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Dallas or the Federal Reserve System.

Funders	Funder number
University of Victoria
Erasmus School of Economics, Cambridge University
Canada Excellence Research Chairs, Government of Canada
Toulouse School of Economics, Kansas State University
Simon Fraser University
The University of Chicago
Glasgow Caledonian University
Natural Sciences and Engineering Research Council of Canada
Princeton Environmental Institute, Princeton University
Universidade Católica Portuguesa
University Research Committee, Emory University
University of California Riverside
Yale University
Universidad Carlos III de Madrid
NBER-NSF Time Series 2022, Women in Econometrics	ASSA 2023, MEG 2022, ESTE 2023, IAAE 2023

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

Access to Document

10.1016/j.jeconom.2024.105702

Cite this

@article{2f2bf0c298554b1584bcaf815bbe0f88,

title = "State-dependent local projections",

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.",

keywords = "Business cycle, Identification, Impulse response, Local projection, Multiplier, Nonlinear structural model, Potential outcomes model, State-dependence, Threshold",

author = "S{\'i}lvia Gon{\c c}alves and Herrera, \{Ana Mar{\'i}a\} and Lutz Kilian and Elena Pesavento",

note = "Publisher Copyright: {\textcopyright} 2024",

year = "2024",

month = sep,

doi = "10.1016/j.jeconom.2024.105702",

language = "English",

volume = "244",

number = "2",

}

TY - JOUR

T1 - State-dependent local projections

AU - Gonçalves, Sílvia

AU - Herrera, Ana María

AU - Kilian, Lutz

AU - Pesavento, Elena

PY - 2024/9

Y1 - 2024/9

N2 - 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.

AB - 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.

KW - Business cycle

KW - Identification

KW - Impulse response

KW - Local projection

KW - Multiplier

KW - Nonlinear structural model

KW - Potential outcomes model

KW - State-dependence

KW - Threshold

UR - https://www.scopus.com/pages/publications/85186075364

UR - https://www.scopus.com/pages/publications/85186075364#tab=citedBy

U2 - 10.1016/j.jeconom.2024.105702

DO - 10.1016/j.jeconom.2024.105702

M3 - Article

AN - SCOPUS:85186075364

SN - 0304-4076

VL - 244

JO - Journal of Econometrics

JF - Journal of Econometrics

IS - 2

M1 - 105702

ER -

State-dependent local projections

Abstract

Bibliographical note

Funding

Keywords

ASJC Scopus subject areas

Access to Document

Other files and links

Fingerprint

Cite this