When and Why State-Dependent Local Projections Work

Valentin Winkler

Papers from arXiv.org

Abstract: This paper studies state-dependent local projections (LPs). First, I establish a general characterization of their estimand: under minimal assumptions, state-dependent LPs recover weighted averages of causal effects. This holds for essentially all specifications used in practice. Second, I show that state-dependent LPs and VARs target different estimands and propose a simple VAR-based estimator whose probability limit equals the LP estimand. Third, in instrumental variable (LP-IV) settings, state-dependent weighting can generate nonzero interaction terms, even when the effects are not state-dependent. Overall, this paper shows how to correctly interpret state-dependent LPs, clarifying their connection to VARs and highlighting a key source of LP-IV misinterpretation.

Date: 2026-01
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2601.01622

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