Dynamic Identification Using System Projections and Instrumental Variables

Daniel Lewis and Karel Mertens

No 17153, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We propose System Projections on Instrumental Variables (SP-IV) to estimate dynamic structural relationships using impulse responses obtained from local projections or vector autoregressions. SP-IV replaces lag sequences of instruments in traditional IV with lead sequences of endogenous variables. By allowing the inclusion of lagged variables as controls, SP-IV weakens exogeneity requirements and can improve efficiency and effective instrument strength relative to 2SLS. We provide inference procedures under strong and weak identification, and show that SP-IV outperforms conventional IV 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 response estimates are consistent with weak but also relatively strong cyclical connections between inflation and unemployment.

Keywords: Structural equations; Instrumental variables; Impulse responses; Robust inference; Phillips curve; Inflation dynamics (search for similar items in EconPapers)
JEL-codes: C32 C36 E3 (search for similar items in EconPapers)
Date: 2022-03
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17153 (application/pdf)

Related works:
Working Paper: Dynamic Identification Using System Projections on Instrumental Variables (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:17153

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17153

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().