Time-varying Local Projections with Stochastic Volatility

Jouchi Nakajima

No 761, Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: This study discusses a general approach to dynamic modeling using the local projection (LP) method. Previous studies have proposed time-varying (TV) parameters in LPs; however, they did not address possible variations in error variances. Overlooking this could introduce significant bias in the estimate of the TV parameter, and consequently, the estimated impulse response. We develop an estimation strategy for LPs with stochastic volatility (SV) and illustrate the importance of SV inclusion using simulated data. Application to a topical macroeconomic time-series analysis illustrates the benefits of the proposed approach in terms of improved predictions.

Keywords: Local projections; Time-varying parameters; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: C15 C22 C53 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2025-03
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hituec:761

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