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Estimation and Inference of Impulse Responses by Local Projections

Òscar Jordà
The American Economic Review
Vol. 95, No. 1 (Mar., 2005), pp. 161-182
Stable URL: http://www.jstor.org/stable/4132675
Page Count: 22
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Estimation and Inference of Impulse Responses by Local Projections
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Abstract

This paper introduces methods to compute impulse responses without specification and estimation of the underlying multivariate dynamic system. The central idea consists in estimating local projections at each period of interest rather than extrapolating into increasingly distant horizons from a given model, as it is done with vector autoregressions (VAR). The advantages of local projections are numerous: (1) they can be estimated by simple regression techniques with standard regression packages; (2) they are more robust to misspecification; (3) joint or point-wise analytic inference is simple; and (4) they easily accommodate experimentation with highly nonlinear and flexible specifications that may be impractical in a multivariate context. Therefore, these methods are a natural alternative to estimating impulse responses from VARs. Monte Carlo evidence and an application to a simple, closed-economy, new-Keynesian model clarify these numerous advantages.

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