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Discussion of "Dynamic Causal Effects in a Nonlinear World: the Good, the Bad, and the Ugly''

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Abstract

This comment discusses Kolesár and Plagborg-Møller's (2025) finding that the standard linear local projection (LP) estimator recovers the average marginal effect (AME) even in nonlinear settings. We apply and discuss a subset their results using a simple nonlinear time series model, emphasizing the role of the weighting function and the impact of nonlinearities on small-sample properties.

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  • Edward P. Herbst & Benjamin K. Johannsen, 2025. "Discussion of "Dynamic Causal Effects in a Nonlinear World: the Good, the Bad, and the Ugly''," Finance and Economics Discussion Series 2025-058, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2025-58
    DOI: 10.17016/FEDS.2025.058
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    1. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
    2. Aruoba, S. Borağan & Bocola, Luigi & Schorfheide, Frank, 2017. "Assessing DSGE model nonlinearities," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 34-54.
    3. Michal Koles'ar & Mikkel Plagborg-M{o}ller, 2024. "Dynamic Causal Effects in a Nonlinear World: the Good, the Bad, and the Ugly," Papers 2411.10415, arXiv.org, revised Jul 2025.
    4. Herbst, Edward P. & Johannsen, Benjamin K., 2024. "Bias in local projections," Journal of Econometrics, Elsevier, vol. 240(1).
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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
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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