Bias in local projections

Edward P. Herbst and Benjamin K. Johannsen

Journal of Econometrics, 2024, vol. 240, issue 1

Abstract: Local projections (LPs) are a popular tool in macroeconomic research. We show that LPs are often used with very small samples in the time dimension and, consequently, that LP point estimates can be severely biased. Under regularity conditions, we derive simple expressions to approximate this bias and propose a way to correct for bias in LPs. Using a medium-scale macroeconomic time-series model, we demonstrate that the bias in point estimates can be economically meaningful. We also show that the same small-sample bias issue can lead some autocorrelation-robust standard errors to understate sampling uncertainty.

Keywords: Small-sample bias; Local projections; Single equation estimation (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:240:y:2024:i:1:s0304407624000010

DOI: 10.1016/j.jeconom.2024.105655

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