Local Projections vs. VARs: Lessons From Thousands of DGPs

Dake Li, Mikkel Plagborg-Moller and Christian Wolf

No 30207, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We conduct a simulation study of Local Projection (LP) and Vector Autoregression (VAR) estimators of structural impulse responses across thousands of data generating processes, designed to mimic the properties of the universe of U.S. macroeconomic data. Our analysis considers various identification schemes and several variants of LP and VAR estimators. A clear bias-variance trade-off emerges: LP estimators have lower bias than VAR estimators but substantially higher variance at intermediate and long horizons. Consequently, unless researchers are overwhelmingly concerned with bias, shrinkage via Bayesian VARs or penalized LPs is attractive.

JEL-codes: C32 C36 (search for similar items in EconPapers)
Date: 2022-07
Note: EFG ME
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Citations: View citations in EconPapers (23)

Published as Dake Li & Mikkel Plagborg-Møller & Christian K. Wolf, 2024. "Local projections vs. VARs: Lessons from thousands of DGPs," Journal of Econometrics, .

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Journal Article: Local projections vs. VARs: Lessons from thousands of DGPs (2024)
Working Paper: Local Projections vs. VARs: Lessons From Thousands of DGPs (2024)
Working Paper: Local Projections vs. VARs: Lessons From Thousands of DGPs (2021)
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