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Inference on the New Keynesian Phillips Curve with Very Many Instrumental Variables

Max-Sebastian Dov\`i

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Abstract: Limited-information inference on New Keynesian Phillips Curves (NKPCs) and other single-equation macroeconomic relations is characterised by weak and high-dimensional instrumental variables (IVs). Beyond the efficiency concerns previously raised in the literature, I show by simulation that ad-hoc selection procedures can lead to substantial biases in post-selection inference. I propose a Sup Score test that remains valid under dependent data, arbitrarily weak identification, and a number of IVs that increases exponentially with the sample size. Conducting inference on a standard NKPC with 359 IVs and 179 observations, I find substantially wider confidence sets than those commonly found.

Date: 2021-01, Revised 2021-03
New Economics Papers: this item is included in nep-ecm and nep-mac
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