State-Dependent Local Projections: Understanding Impulse Response Heterogeneity


James S. Cloyne

Alan M. Taylor

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2023-05 | February 1, 2023

An impulse response is the dynamic average effect of an intervention across horizons. We use the well-known Kitagawa-Blinder-Oaxaca decomposition to explore a response’s heterogeneity over time and over states of the economy. This can be implemented with a simple extension to the usual local projection specification that nevertheless keeps the model linear in parameters. Using our new decomposition-based approach, we show how to unpack heterogeneity in the fiscal multiplier, an object that at any point in time may depend on a number of potentially correlated factors, including existing economic conditions and the monetary response. In our application, the fiscal multiplier varies considerably with monetary policy: it can be as small as zero, or as large as 2, depending on the degree of monetary offset.

Article Citation

Taylor, Alan M., James S. Cloyne, and Oscar Jorda. 2023. “State-Dependent Local Projections: Understanding Impulse Response Heterogeneity,” Federal Reserve Bank of San Francisco Working Paper 2023-05. Available at

About the Author
Òscar Jordà
Òscar Jordà is a senior policy advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Òscar Jordà