A0238
Title: Local projections, autocorrelation, and efficiency
Authors: Amaze Lusompa - Federal Reserve Bank of Kansas City (United States) [presenting]
Abstract: It is well known that Local Projections (LP) residuals are autocorrelated. Conventional wisdom says that LP have to be estimated by OLS with Newey-West (or some type of Heteroskedastic and Autocorrelation Consistent (HAC)) standard errors and that GLS is not possible because the autocorrelation process is unknown and/or because the GLS estimator would be inconsistent. We show that the autocorrelation process of LP is known and can be corrected by using a consistent GLS estimator. Estimating LP with GLS has three major implications: 1) LP GLS can be less biased, more efficient, and generally has better coverage properties than estimation by OLS with HAC standard errors. 2) Consistency of the LP GLS estimator gives a general counterexample showing that strict exogeneity is not a necessary condition for GLS. 3) Since the autocorrelation process can be modeled explicitly, it is now possible to estimate time-varying parameter LP.
