This paper is now published in Econometrica.

Abstract

We prove that local projections (LPs) and Vector Autoregressions (VARs) estimate the same impulse responses. This nonparametric result only requires unrestricted lag structures. We discuss several implications: (i) LP and VAR estimators are not conceptually separate procedures, instead, they are simply two dimension reduction techniques with common estimand but different finite-sample properties. (ii) VAR-based structural identification – including short-run, long-run, or sign restrictions – can equivalently be performed using LPs, and vice versa. (iii) Structural estimation with an instrument (proxy) can be carried out by ordering the instrument first in a recursive VAR, even under non-invertibility. (iv) Linear VARs are as robust to non-linearities as linear LPs.