Inference with High-Dimensional Weak Instruments and the New Keynesian Phillips Curve

Max-Sebastian Dovì

Journal of Business & Economic Statistics, 2025, vol. 43, issue 4, 1064-1076

Abstract: Inference on macroeconomic relations using instrumental variables (IVs) is often characterized by weak and high-dimensional IVs. I propose a weak-IV robust method that remains valid under dependent data, arbitrarily weak identification, and a number of IVs that can increase exponentially with the sample size. I show by simulation that using methods that are not robust to weak and high-dimensional IVs can lead to substantially biased inference, while the proposed test has good size and power properties. Conducting inference on a US New Keynesian Phillips Curve with 473 IVs and 116 observations, I find substantially wider confidence sets than those commonly reported in the literature.

Date: 2025
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DOI: 10.1080/07350015.2025.2473914

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