How Reliable Are Local Projection Estimators of Impulse Responses?

We compare the finite-sample performance of impulse response confidence intervals based on local projections (LPs) and vector autoregressive (VAR) models in linear stationary settings. We find that in small samples, the asymptotic LP interval often is less accurate than the bias-adjusted bootstrap VAR interval, notwithstanding its excessive average length. Although the asymptotic LP interval has adequate coverage in sufficiently large samples, its average length still far exceeds that of bias-adjusted bootstrap VAR intervals with comparable accuracy. Bootstrap LP intervals (with or without bias correction) and asymptotic VAR intervals are shorter on average, but they often lack coverage accuracy in finite samples.