When and Why State-Dependent Local Projections Work

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Authors: Valentin Winkler
Cited by: 0

Abstract

This paper studies state-dependent local projections (LPs). First, I establish a general characterization of their estimand: under minimal assumptions, state-dependent LPs recover weighted averages of causal effects. This holds for essentially all specifications used in practice. Second, I show that state-dependent LPs and VARs target different estimands and propose a simple VAR-based estimator whose probability limit equals the LP estimand. Third, in instrumental variable (LP-IV) settings, state-dependent weighting can generate nonzero interaction terms, even when the effects are not state-dependent. Overall, this paper shows how to correctly interpret state-dependent LPs, clarifying their connection to VARs and highlighting a key source of LP-IV misinterpretation.

Fields of Study & Subjects

Advanced Causal Inference Techniques Monetary Policy and Economic Impact Economic Policies and Impacts

Publication details

Journal / source
arXiv (Cornell University)
Publication date
4 January 2026
Document type
Preprint