Double Robustness of Local Projections and Some Unpleasant VARithmetic

José Luis Montiel Olea, Mikkel Plagborg-Moller, Eric Qian and Christian Wolf

No 32495, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We consider impulse response inference in a locally misspecified vector autoregression (VAR) model. The conventional local projection (LP) confidence interval has correct coverage even when the misspecification is so large that it can be detected with probability approaching 1. This result follows from a “double robustness” property analogous to that of popular partially linear regression estimators. In contrast, the conventional VAR confidence interval with short-to-moderate lag length can severely undercover, even for misspecification that is small, economically plausible, and difficult to detect statistically. There is no free lunch: the VAR confidence interval has robust coverage only if the lag length is so large that the interval is as wide as the LP interval.

JEL-codes: C22 C32 (search for similar items in EconPapers)
Date: 2024-05
Note: EFG ME
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Citations: View citations in EconPapers (8)

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