Working Paper

Local Projections

Abstract: A central question in applied research is to estimate the effect of an exogenous intervention or shock on an outcome. The intervention can affect the outcome and controls on impact and over time. Moreover, there can be subsequent feedback between outcomes, controls and the intervention. Many of these interactions can be untangled using local projections. This method’s simplicity makes it a convenient and versatile tool in the empiricist’s kit, one that is generalizable to complex settings. This article reviews the state-of-the art for the practitioner, discusses best practices and possible extensions of local projections methods, along with their limitations.

Keywords: local projections; impulse response; multipliers; bias; inference; instrumental variables; policy evaluation; Kitagawa decomposition; panel data;

JEL Classification: C01; C14; C22; C26; C32; C54;

https://doi.org/10.24148/wp2024-24

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2024-08-12

Number: 2024-24