Causal State-Dependent Local Projections (opens in new tab)

State-dependent local projections (LPs) are widely used to estimate how responses to exogenous aggregate shocks vary as a function of observable state variables, yet their causal interpretation remains unclear. We show that this interpretation obtains under the sufficient condition that the conditional mean is linear in the aggregate shock at each horizon, and that this condition holds in a broad class of canonical micro-macro environments, incl...