Heterogeneous Local Projections

Abstract: In this paper, we propose a novel methodology to estimate the dynamic effects of structural aggregate shocks on individual outcomes in the presence of a latent group structure. The methodology is based on a panel local projection estimator that allows researchers to assign individuals to the correct group and estimate group-specific dynamic responses, thus enabling researchers to estimate heterogeneous local projections. Monte Carlo simulations show that, in small samples, the methodology successfully identifies the group structure with high probability and delivers reliable inference.