What Impulse Response Do Instrumental Variables Identify?

Bonsoo Koo, Seojeong Lee and Myung Hwan Seo

Papers from arXiv.org

Abstract: Macro shocks are often composites, yet overlooked in the impulse response analysis. When an instrumental variable (IV) is used to identify a composite shock, it violates the common IV exclusion restriction. We show that the Local Projection-IV estimand is represented as a weighted average of component-wise impulse responses but with possibly negative weights, which occur when the IV and shock components have opposite correlations. We further develop alternative (set-) identification strategies for the LP-IV based on sign restrictions or additional granular information. Our applications confirm the composite nature of monetary policy shocks and reveal a non-defense spending multiplier exceeding one.

Date: 2022-08, Revised 2023-08
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2208.11828 Latest version (application/pdf)

Related works:
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:arx:papers:2208.11828

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().