Differences From Differencing
Should Local Projections With Observed Shocks Be Estimated in Levels or Differences
Bibliographic Data
| ID | 21653249 |
|---|---|
| Authors | Jeremy Piger (0000-0001-6592-9986, Department of Economics University of Oregon Eugene Oregon USA, corresponding author), Thomas Stockwell (Department of Economics, Sykes College of Business University of Tampa Tampa Florida USA) |
| Year | 2025 |
| Volume | 40 |
| Issue | 7 |
| Pages | 759-787 |
| Publication date | 2025-11-01 |
| Open Access | Yes |
| Type | ARTICLE |
| Venue | Journal of Applied Econometrics (JOURNAL) |
| Journal identifiers | ISSN: 1099-1255 • E-ISSN: 0883-7252 |
| Publisher | Wiley (PUBLISHER • GB) |
| DOI | 10.1002/jae.70003 |
| OpenAlex | W4412822615 |
| Language | EN |
| Citations received | 1 |
| References cited | 31 |
We show there are large finite‐sample estimation improvements from estimating local projections (LP) in a cumulated differences (long‐differenced) specification vs. a specification in levels when the impulse response of interest is to an externally identified (“observed”) shock. The long‐differenced specification substantially reduces, and in many cases eliminates, estimation bias, as well as significantly improves confidence interval coverage. These improvements increase for more persistent processes, at longer horizons, and for smaller sample sizes and extend to the instrumental variable LP (LP‐IV) setting where the observed shock is an instrument for an endogenous variable of interest. We demonstrate these results via simulations as well as illustrative analytic results
Econometrics · Economics · Statistics · Environmental Science · Forecasting Techniques and Applications · Market Dynamics and Volatility · Mathematics · Monetary Policy and Economic Impact
Local Projections and VARs Estimate the Same Impulse Responses
Estimation and Inference of Impulse Responses by Local Projections
Credit Spreads and Business Cycle Fluctuations
Detrending, stylized facts and the business cycle
Instrumental Variables Regression with Weak Instruments
Trends and Cycles in Macroeconomic Time Series
Estimating Potential Output as a Latent Variable
How Reliable Are Local Projection Estimators of Impulse Responses
Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
Government Spending Multipliers in Good Times and in Bad
Identification and Estimation of Dynamic Causal Effects in Macroeconomics Using External Instruments
| Citations per year | 1 |
|---|---|
| Citation span | 2026 - 2026 (1) |
| Highly cited | No |