 State-dependent local projectionsSílvia Gonçalves, Ana María Herrera, Lutz Kilian and Elena Pesavento Journal of Econometrics, 2024, vol. 244, issue 2 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: Local projection; Business cycle; State-dependence; Impulse response; Multiplier; Threshold; Identification; Nonlinear structural model; Potential outcomes model (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:244:y:2024:i:2:s0304407624000484 DOI: 10.1016/j.jeconom.2024.105702 Access Statistics for this article Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson More articles in Journal of Econometrics from Elsevier |
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