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State-dependent local projections

Author

Listed:
  • Gonçalves, Sílvia
  • Herrera, Ana María
  • Kilian, Lutz
  • Pesavento, Elena

Abstract

Do state-dependent local projections asymptotically recover the population responses of macroeconomic aggregates to structural shocks? The answer to this question depends on how the state of the economy is determined and on the magnitude of the shocks. When the state is exogenous, the local projection estimator recovers the population response regardless of the shock size. When the state depends on macroeconomic shocks, as is common in empirical work, local projections only recover the conditional response to an infinitesimal shock, but not the responses to larger shocks of interest in many applications. Simulations suggest that impulse responses may be off by as much as 82 percent and fiscal multipliers by as much as 40 percent.

Suggested Citation

  • Gonçalves, Sílvia & Herrera, Ana María & Kilian, Lutz & Pesavento, Elena, 2024. "State-dependent local projections," Journal of Econometrics, Elsevier, vol. 244(2).
    • Handle: RePEc:eee:econom:v:244:y:2024:i:2:s0304407624000484
    DOI: 10.1016/j.jeconom.2024.105702
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    Citations

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    Cited by:

    1. Castro Nofal, Bastian & Díaz, Juan D. & Gutiérrez Cubillos, Pablo & Hansen, Erwin, 2024. "On the robustness of the relationship between tax progressivity, growth, and inequality in the US," Economics Letters, Elsevier, vol. 241(C).
    2. Òscar Jordà & Alan M. Taylor, 2024. "Local Projections," NBER Working Papers 32822, National Bureau of Economic Research, Inc.
    3. De Santis, Roberto A. & Tornese, Tommaso, 2024. "US monetary policy is more powerful in low economic growth regimes," Working Paper Series 2919, European Central Bank.
    4. Eugene Dettaa & Endong Wang, 2024. "Inference in High-Dimensional Linear Projections: Multi-Horizon Granger Causality and Network Connectedness," Papers 2410.04330, arXiv.org.
    5. Silvia Goncalves & Ana María Herrera & Lutz Kilian & Elena Pesavento, 2024. "Nonparametric Local Projections," Working Papers 2414, Federal Reserve Bank of Dallas.
    6. William D. Larson & Andrew B. Martinez, 2024. "House Prices, Debt Burdens, and the Heterogeneous Effects of Mortgage Rate Shocks," Working Papers 2024-002, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting.
    7. Tovar Jalles, João & Park, Donghyun & Qureshi, Irfan, 2024. "Public and Private Investment as Catalysts for Growth: An analysis of emerging markets and developing economies with a focus on Asia," Journal of International Money and Finance, Elsevier, vol. 148(C).
    8. Checherita-Westphal, Cristina & Pesso, Tom, 2024. "Fiscal policy and inflation: accounting for non-linearities in government debt," Working Paper Series 2996, European Central Bank.
    9. repec:ecb:ecbdps:202426 is not listed on IDEAS
    10. Endong Wang, 2024. "Structural counterfactual analysis in macroeconomics: theory and inference," Papers 2409.09577, arXiv.org.
    11. Juan R. Hernández & Mateo Hoyos & Daniel Ventosa-Santaulària, 2024. "Monetary Policy in Emerging Markets under Global Uncertainty," Working Papers DTE 634, CIDE, División de Economía.
    12. Emter, Lorenz & Setzer, Ralph & Zorell, Nico & Moura, Afonso S., 2024. "Monetary policy and growth-at-risk: the role of institutional quality," Working Paper Series 2989, European Central Bank.

    More about this item

    Keywords

    Local projection; Business cycle; State-dependence; Impulse response; Multiplier; Threshold; Identification; Nonlinear structural model; Potential outcomes model;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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