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Bayesian Local Projections

Author

Listed:
  • Leonardo N. Ferreira

    (Central Bank of Brazil)

  • Silvia Miranda-Agrippino

    (Bank of England, CfM(LSE) and CEPR)

  • Giovanni Ricco

    (École Polytechnique, University of Warwick, OFCE-Sciences Po and CEPR)

Abstract
We propose a Bayesian approach to Local Projections that optimally addresses the empirical bias-variance trade-off intrinsic in the choice between direct and iterative methods. Bayesian Local Projections (BLP) regularise LP regressions via informative priors, and estimate impulse response functions that capture the properties of the data more accurately than iterative VARs. BLPs preserve the flexibility of LPs while retaining a degree of estimation uncertainty comparable to Bayesian VARs with standard macroeconomic priors. As regularised direct forecasts, BLPs are also a valuable alternative to BVARs for multivariate out-of-sample projections.

Suggested Citation

  • Leonardo N. Ferreira & Silvia Miranda-Agrippino & Giovanni Ricco, 2023. "Bayesian Local Projections," Working Papers 2023-04, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2023-04
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    Cited by:

    1. Atsushi Inoue & `Oscar Jord`a & Guido M. Kuersteiner, 2023. "Inference for Local Projections," Papers 2306.03073, arXiv.org, revised Aug 2024.
    2. Tomás Opazo, 2023. "The Heterogeneous Effect of Monetary Policy Shocks: Evidence for US Households," Working Papers Central Bank of Chile 992, Central Bank of Chile.

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    More about this item

    Keywords

    Local Projections; VARs; Bayesian Techniques; Impulse Response Functions; Direct Forecasting;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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