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The Retreat from Causality: Local Projections and Econometrics Without Economics

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  • Chung, Sungyup

Abstract

This paper critically examines the local projections method introduced by Jordà (2005), questioning its validity in the absence of a well-defined causal framework. Although local projections have been widely adopted for their technical simplicity and perceived robustness, this study argues that such methods may obscure, rather than clarify, underlying causal mechanisms. At the heart of the critique is the method's neglect of the recursive and interdependent structure of the data-generating process, which results in logically inconsistent assumptions and potentially distorted forecasts.

Suggested Citation

  • Chung, Sungyup, 2025. "The Retreat from Causality: Local Projections and Econometrics Without Economics," MPRA Paper 125198, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:125198
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    References listed on IDEAS

    as
    1. Lutz Kilian & Yun Jung Kim, 2011. "How Reliable Are Local Projection Estimators of Impulse Responses?," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1460-1466, November.
    2. Herbst, Edward P. & Johannsen, Benjamin K., 2024. "Bias in local projections," Journal of Econometrics, Elsevier, vol. 240(1).
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    JEL classification:

    • A11 - General Economics and Teaching - - General Economics - - - Role of Economics; Role of Economists
    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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