Instrumental Variable Identification of Dynamic Variance Decompositions

Mikkel Plagborg-Moller and Christian Wolf

No 29044, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Macroeconomists increasingly use external sources of exogenous variation for causal inference. However, unless such external instruments (proxies) capture the underlying shock without measurement error, existing methods are silent on the importance of that shock for macroeconomic fluctuations. We show that, in a general moving average model with external instruments, variance decompositions for the instrumented shock are interval-identified, with informative bounds. Various additional restrictions guarantee point identification of both variance and historical decompositions. Unlike SVAR analysis, our methods do not require invertibility. Applied to U.S. data, they give a tight upper bound on the importance of monetary shocks for inflation dynamics.

JEL-codes: C32 C36 (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-isf, nep-mac and nep-ore
Note: EFG ME
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Citations: View citations in EconPapers (17)

Published as Mikkel Plagborg-Møller & Christian K. Wolf, 2022. "Instrumental Variable Identification of Dynamic Variance Decompositions," Journal of Political Economy, vol 130(8), pages 2164-2202.

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Journal Article: Instrumental Variable Identification of Dynamic Variance Decompositions (2022)
Working Paper: Instrumental Variable Identification of Dynamic Variance Decompositions (2021)
Working Paper: Instrumental Variable Identification of Dynamic Variance Decompositions (2021)
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