Please join us for an Economics Department Research Seminar Series event:

Friday, March 3rd, 2023

Department of Economics

Faculty Research Presentation

Presenter: Mikkel Plagborg-Møller, Princeton University

Title:"Local Projections vs. VARs: Lessons From Thousands of DGPs"

Time: 3:10PM EST

Location: RBC 271

Abstract: We conduct a simulation study of Local Projection (LP) and Vector Autoregression (VAR) estimators of structural impulse responses across thousands of data generating processes, designed to mimic the properties of the universe of U.S. macroeconomic data. Our analysis considers various identification schemes and several variants of LP and VAR estimators. A clear bias-variance trade-off emerges: LP estimators have lower bias than VAR estimators but substantially higher variance at intermediate and long horizons. Consequently, unless researchers are overwhelmingly concerned with bias, shrinkage via Bayesian VARs or penalized LPs is attractive.