Dynamic Identification Using System Projections on Instrumental Variables

Daniel Lewis and Karel Mertens

No 2204, Working Papers from Federal Reserve Bank of Dallas

Abstract: We propose System Projections on Instrumental Variables (SP-IV) to estimate structural relationships using regressions of structural impulse responses obtained from local projections or vector autoregressions. Relative to IV with distributed lags of shocks as instruments, SP-IV imposes weaker exogeneity requirements and can improve efficiency and increase effective instrument strength relative to the typical 2SLS estimator. We describe inference under strong and weak identification. The SP-IV estimator outperforms other estimators of Phillips Curve parameters in simulations. We estimate the Phillips Curve implied by the main business cycle shock of Angeletos et al. (2020) and find that the impulse responses are consistent with weak but also relatively strong cyclical connections between inflation and unemployment.

Keywords: Structural Equations; Instrumental Variables; Impulse Responses; Robust Inferences; Phillips Curve; Inflation Dynamics (search for similar items in EconPapers)
JEL-codes: C32 C36 E3 (search for similar items in EconPapers)
Pages: 55
Date: 2022-03-30, Revised 2024-07-03
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-ore
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Related works:
Working Paper: Dynamic Identification Using System Projections and Instrumental Variables (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:93894

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DOI: 10.24149/wp2204r3

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