Bayesian Inference of Local Projections with Roughness Penalty Priors

A local projection is a statistical framework that accounts for the relationship between an exogenous variable and an endogenous variable, measured at different time points. Local projections are often applied in impulse response analyses and direct forecasting. While local projections are becoming increasingly popular because of their robustness to misspecification and their flexibility, they are less statistically efficient than standard methods, such as vector autoregression. In this study, w...