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arXiv · 2601.01622

When and Why State-Dependent Local Projections Work

Valentin Winkler
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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.

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Valentin Winkler. 2026-01-04. When and Why State-Dependent Local Projections Work. https://arxiv.org/abs/2601.01622

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