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Predictive Accuracy of Impulse Responses Estimated Using Local Projections and Vector Autoregressions

Author

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  • Psaradakis Zacharias

    (Birkbeck Business School, Birkbeck, University of London, London, UK)

  • Sola Martin

    (Department of Economics, Universidad Torcuato di Tella, Buenos Aires, Argentina)

  • Spagnolo Nicola

    (Brunel Business School, Brunel University, London, UK)

  • Yunis Patricio

    (Department of Economics, University of Pennsylvania, Philadelphia, USA)

Abstract

We examine the finite-sample accuracy of impulse responses obtained using local projections (LP) and vector autoregressive (VAR) models. In view of the fact that impulse responses are differences between multistep predictors, we propose to assess the relative performance of impulse-response estimators using tests for equal predictive accuracy. In our Monte Carlo experiments, LP-based and VAR-based estimators are found to be equally accurate in large samples under a mean-squared-error risk function. VAR-based estimators tend to have an advantage over LP-based estimators in small and moderately sized samples, particularly at long horizons.

Suggested Citation

  • Psaradakis Zacharias & Sola Martin & Spagnolo Nicola & Yunis Patricio, 2026. "Predictive Accuracy of Impulse Responses Estimated Using Local Projections and Vector Autoregressions," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 30(3), pages 431-441.
    • Handle: RePEc:bpj:sndecm:v:30:y:2026:i:3:p:431-441:n:1002
    DOI: 10.1515/snde-2024-0053
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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