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State-Dependent Local Projections: Understanding Impulse Response Heterogeneity

Author

Listed:
  • James Cloyne
  • Òscar Jordà
  • Alan M. Taylor

Abstract

An impulse response is the dynamic average effect of an intervention across horizons. We use the well-known Kitagawa-Blinder-Oaxaca decomposition to explore a response’s heterogeneity over time and over states of the economy. This can be implemented with a simple extension to the usual local projection specification that nevertheless keeps the model linear in parameters. Using our new decomposition-based approach, we show how to unpack heterogeneity in the fiscal multiplier, an object that at any point in time may depend on a number of potentially correlated factors, including existing economic conditions and the monetary response. In our application, the fiscal multiplier varies considerably with monetary policy: it can be as small as zero, or as large as 2, depending on the degree of monetary offset.

Suggested Citation

  • James Cloyne & Òscar Jordà & Alan M. Taylor, 2023. "State-Dependent Local Projections: Understanding Impulse Response Heterogeneity," NBER Working Papers 30971, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30971
    Note: EFG IFM ME
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    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • C99 - Mathematical and Quantitative Methods - - Design of Experiments - - - Other
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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