Adam Smith Business School

Professor Professor Silvia Goncalves, McGill University

'When do state-dependent local projections work? '
March 18, 2.00-5.00pm
Room 305, Adam Smith Business School 

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Abstract

Many empirical studies estimate impulse response functions that depend on the state of the economy. Most of these studies rely on a variant of the local projection (LP) approach to estimate the state-dependent impulse response functions. Despite its widespread application, the asymptotic validity of the LP approach to estimating state-dependent impulse responses has not been established to date. We formally derive this result for a structural state-dependent vector autoregressive process. The model only requires the structural shock of interest to be identified. A crucial condition for the consistency of the state-dependent LP estimator of the response function is that current and future states are conditionally mean independent of the structural shocks, given the information available at the time the shock is realized. This rules out models in which the state of the economy is a function of current or future realizations of the endogenous model variables, as is often the case in applied work. Even when the state is a function of past values of these variables only, consistency may hold only at short horizons.

 

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First published: 22 February 2022