Making Weak Instrument Sets Stronger: Factor‐Based Estimation of Inflation Dynamics and a Monetary Policy Rule

Harun Mirza and Lidia Storjohann

Journal of Money, Credit and Banking, 2014, vol. 46, issue 4, 643-664

Abstract: The problem of weak identification has recently attracted attention in the analysis of structural macroeconomic models. Using robust methods can result in large confidence sets making precise inference difficult. We overcome this problem in the analysis of the hybrid New Keynesian Phillips Curve and a forward‐looking Taylor rule by employing stronger instruments. We suggest exploiting information from a large macroeconomic data set by generating factors and using them as additional instruments. This approach results in stronger instrument sets and hence smaller weak‐identification robust confidence sets. It allows us to conclude that there has been a shift toward more active monetary policy from the pre‐Volcker regime to the Volcker–Greenspan tenure.

Date: 2014
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https://doi.org/10.1111/jmcb.12120

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:46:y:2014:i:4:p:643-664

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