Quantitative Economics

Journal Of The Econometric Society

Edited by: Stéphane Bonhomme • Print ISSN: 1759-7323 • Online ISSN: 1759-7331

Quantitative Economics: Nov, 2023, Volume 14, Issue 4

Local Projections, Autocorrelation, and Efficiency

https://doi.org/10.3982/QE1988
p. 1199-1220

Amaze Lusompa

It is well known that Local Projections (LP) residuals are autocorrelated. Conventional wisdom says that LP have to be estimated by OLS and that GLS is not possible because the autocorrelation process is unknown and/or because the GLS estimator would be inconsistent. I show that the autocorrelation process of LP can be written as a Vector Moving Average (VMA) process of the Wold errors and impulse responses and that autocorrelation can be corrected for using a consistent GLS estimator. Monte Carlo simulations show that estimating LP with GLS can lead to more efficient estimates.


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Supplemental Material

Supplement to "Local Projections, Autocorrelation, and Efficiency"

Amaze Lusompa

This online appendix contains material not found within the manuscript.

Supplement to "Local Projections, Autocorrelation, and Efficiency"

Amaze Lusompa

This zip file contains the replication files for the manuscript.