What happens to the price of eggs when the government cuts taxes? If the Federal Reserve raises its interest rate, does that affect whether companies invest in green energy?
These are incredibly complicated questions that are possible to answer with a statistical method created by Òscar Jordà, a professor of economics in the College of Letters and Science at UC Davis. For this innovation and his contributions to the field of economics across his career, Jordà has been named a Fellow of the Econometric Society.
“This method allowed researchers to do things that they couldn't very easily do before because of the complexity,” said Jordà, also an economist with the San Francisco Federal Reserve. “It showed people how to do the types of analyses they probably wanted to do all along but didn’t have the statistical tool.”
Jordà’s method, which he called “local projections,” combines two separate ways of thinking about relationships between an event and its repercussions across the economy.
One way of thinking comes from the theory of signal processing, where an event might ripple through a complex system like a country’s economy. The goal of this kind of analysis is to decide what channels and mechanisms create those ripple effects. For example, a Federal Reserve interest rate hike might reduce consumer spending, which might, in turn, destroy jobs.
“That approach has resonance with the way we think about economies, because we think of economies as dynamic systems,” said Jordà. “You intervene in fiscal policy and that has repercussions.”
But those repercussions come through a variety of channels that are difficult to untangle because a system like the national economy is so complex.
Combining two lines of research to study complex systems
Jordà thought there might be a way to make those repercussions easier to calculate for the purpose of estimating impacts. Economists had long been using randomized controlled trials to measure the direct aftermath of an intervention. Commonly used for drug trials and to measure the impacts of public policy, this approach compares changes between a group of people who receive a “treatment” and a similar group of people who do not.
Jordà combined the approach of a randomized controlled trial with the signal processing method to make answering large economic questions more manageable. With local projections, a researcher doesn’t need to know every aspect of the dynamics of a system. It works instead by comparing two forecasts under different circumstances with data that are available.
Jordà published the first paper on local projections in 2005. This year, he published a paper with co-author and UC Davis colleague Alan Taylor, a Distinguished Professor Emeritus of economics, that reviews the method’s state-of-the-art with best practices and applications.
“Marrying these two ideas into one is a synthesis of how we think about problems in economics,” said Jordà. “That's where it really generated a literature in applied economics and the exploration of a lot of topics that previously were difficult to examine.”
The Econometric Society is an international society for the advancement of economic theory in its relation to statistics and mathematics. Founded in 1930, it publishes the leading economics journal Econometrica. Its Fellows include 2025 Nobel laureates Joel Mokyr, Philippe Aghion and Peter Howitt as well as 2024 Nobel laureates Daron Acemoglu, Simon Johnson and James A. Robinson.
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