What Impulse Response Do Instrumental Variables Identify?

Bonsoo Koo, Seojeong Lee, Myung Hwan Seo and Masaya Takano

Papers from arXiv.org

Abstract: Macroeconomic shocks are often composites of multiple components. We show that the local projection-IV (LP-IV) estimand aggregates component-wise impulse responses with potentially negative weights, challenging its causal interpretation. To address this, we propose identification strategies using multiple sign-restricted IVs or disaggregated data, which recover structurally meaningful responses even when individual LP-IV estimands are non-causal. We also show that, under weak stationarity, the identified sets are sharp and cannot be further narrowed in some key cases. Applications to fiscal and monetary policy demonstrate the practical value of our approach.

Date: 2022-08, Revised 2025-07
New Economics Papers: this item is included in nep-ecm
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2208.11828

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