Econometrica: Mar, 2021, Volume 89, Issue 2
Local Projections and VARs Estimate the Same Impulse Responses
https://doi.org/10.3982/ECTA17813
p. 955-980
Mikkel PlagborgâMøller, Christian K. Wolf
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 finiteâsample properties. (ii) VARâbased structural identificationâincluding shortârun, longârun, or sign restrictionsâcan 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.
Supplemental Material
Supplement to "Local Projections and VARs Estimate the Same Impulse Responses"
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Supplement to "Local Projections and VARs Estimate the Same Impulse Responses"
This online appendix contains supplemental material for the article âLocal Projections and VARs Estimate the Same Impulse Responsesâ.
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