Local Projections, Autocorrelation, and Efficiency

Amaze Lusompa

MPRA Paper from University Library of Munich, Germany

Abstract: It is well known that Local Projections (LP) residuals are autocorrelated. Conventional wisdom says that LP have to be estimated by OLS with Newey and West (1987) (or some type of Heteroskedastic and Autocorrelation Consistent (HAC)) standard errors and that GLS is not possible because the autocorrelation process is unknown. I show that the autocorrelation process of LP is known and that autocorrelation can be corrected for using GLS. Estimating LP with GLS has three major implications: 1) LP GLS can be substantially more efficient and less biased than estimation by OLS with Newey-West standard errors. 2) Since the autocorrelation process can be modeled explicitly, it is possible to give a fully Bayesian treatment of LP. That is, LP can be estimated using frequentist/classical or fully Bayesian methods. 3) Since the autocorrelation process can be modeled explicitly, it is now possible to estimate time-varying parameter LP.

Keywords: Impulse Response; Local Projections; Autocorrelation; GLS (search for similar items in EconPapers)
JEL-codes: C1 C11 C2 C22 C3 C32 (search for similar items in EconPapers)
Date: 2019-11-14, Revised 2020-04-11
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Local Projections, Autocorrelation, and Efficiency (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:99856

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