journal article Jan 01, 2021

Local Projections and VARs Estimate the Same Impulse Responses

Econometrica Vol. 89 No. 2 pp. 955-980 · JSTOR
View at Publisher Save 10.3982/ecta17813
Abstract
We prove that local projections (LPs) and Vector Autoregressions (VARs) estimate the same impulse responses. This nonparametric result only requires unrestricted lag structures. We discuss several implications: (i) LP and VAR estimators are not conceptually separate procedures; instead, they are simply two dimension reduction techniques with common estimand but different finite‐sample properties. (ii) VAR‐based structural identification—including short‐run, long‐run, or sign restrictions—can equivalently be performed using LPs, and vice versa. (iii) Structural estimation with an instrument (proxy) can be carried out by ordering the instrument first in a recursive VAR, even under noninvertibility. (iv) Linear VARs are as robust to nonlinearities as linear LPs.
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Metrics
553
Citations
69
References
Details
Published
Jan 01, 2021
Vol/Issue
89(2)
Pages
955-980
Funding
National Science Foundation
Cite This Article
Mikkel Plagborg-Møller, Christian K. Wolf (2021). Local Projections and VARs Estimate the Same Impulse Responses. Econometrica, 89(2), 955-980. https://doi.org/10.3982/ecta17813
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