When and Why State-Dependent Local Projections Work
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.
Keywords
Cite
@article{arxiv.2601.01622,
title = {When and Why State-Dependent Local Projections Work},
author = {Valentin Winkler},
journal= {arXiv preprint arXiv:2601.01622},
year = {2026}
}