It is well known that Local Projections (LP) residuals are autocorrelated. Conventional
wisdom says that LP have to be estimated by OLS and that GLS is not possible because the
autocorrelation process is unknown and/or because the GLS estimator would be
inconsistent. I show that the autocorrelation process of LP can be written as a Vector Moving
Average (VMA) process of the Wold errors and impulse responses and that autocorrelation
can be corrected for using a consistent GLS estimator. Monte Carlo simulations show that …

Local Projections, Autocorrelation, and Efficiency - Amaze Lusompa March 2021 RWP 21-01
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Amaze Lusompa March 2021 RWP 21-01 … Local Projections, Autocorrelation, and
Efficiency - Amaze Lusompa March 2021 RWP 21-01 …