The Retreat from Causality: Local Projections and Econometrics Without Economics

Sungyup Chung

MPRA Paper from University Library of Munich, Germany

Abstract: This paper critically examines the local projections method introduced by Jordà (2005), questioning its validity in the absence of a well-defined causal framework. Although local projections have been widely adopted for their technical simplicity and perceived robustness, this study argues that such methods may obscure, rather than clarify, underlying causal mechanisms. At the heart of the critique is the method's neglect of the recursive and interdependent structure of the data-generating process, which results in logically inconsistent assumptions and potentially distorted forecasts.

Keywords: Local Projection; Causality; Econometrics (search for similar items in EconPapers)
JEL-codes: A11 A12 C18 C50 (search for similar items in EconPapers)
Date: 2025-04-30
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