In the article, "GLS estimation of local projections: Trading robustness for efficiency," De Vos and co-author Gerdie Everaert evaluates how Generalized Least Squares (GLS) transformations can improve the accuracy of impulse response functions. The paper provides critical guidance on balancing efficiency gains with the robustness of Local Projections.
The authors demonstrate that while certain GLS transformations reduce estimation noise, they may sacrifice the robustness of local projections by introducing rigidities similar to traditional Vector Autoregression (VAR) models. The study highlights that such transformations risk reintroducing misspecification issues, suggesting a careful balance between efficiency and model accuracy is required in applied econometric analysis.
The paper provides critical guidance on balancing efficiency gains with the robustness of Local Projections.