Note on Local Projections as a System of Equations

05/26/2020

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by   Masahiro Tanaka, et al.

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This note discusses inference of local projections. We examine the relationship between local projections and a vector moving average process and derive an analytical representation of the covariance matrix of the residuals of local projections. We see that local projections can be treated as a system of equations with correlated residuals, i.e., seemingly unrelated regressions. By means of numerical experiments, we confirm that such treatment of local projections is tenable for finite samples.