Local Projections and VARs Estimate the Same Impulse Responses

Mikkel Plagborg-Møller and Christian Wolf
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Mikkel Plagborg-Møller: Princeton University
Authors registered in the RePEc Author Service: Mikkel Plagborg-Moller

Working Papers from Princeton University. Economics Department.

Abstract: We prove that local projections (LPs) and Vector Autoregressions (VARs) estimate the same impulse responses. This nonparametric result only requires unrestricted lag structures. We discuss several implications: (i) LP and VAR estimators are not conceptually separate procedures, instead, they are simply two dimension reduction techniques with common estimand but different finite-sample properties. (ii) VAR-based structural identification – including short-run, long-run, or sign restrictions – can equivalently be performed using LPs, and vice versa. (iii) Structural estimation with an instrument (proxy) can be carried out by ordering the instrument first in a recursive VAR, even under non-invertibility. (iv) Linear VARs are as robust to non-linearities as linear LPs.

Keywords: external instrument; impulse response function; local projection; proxy variable; structural vector autoregression (search for similar items in EconPapers)
JEL-codes: C32 C36 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-ban, nep-ecm, nep-ets and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Local Projections and VARs Estimate the Same Impulse Responses (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2020-16

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