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Proxy SVARs: Asymptotic Theory, Bootstrap Inference, and the Effects of Income Tax Changes in the United States

Kurt Lunsford and Carsen Jentsch

No 1619, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: Proxy structural vector autoregressions (SVARs) identify structural shocks in vector autoregressions (VARs) with external proxy variables that are correlated with the structural shocks of interest but uncorrelated with other structural shocks. We provide asymptotic theory for proxy SVARs when the VAR innovations and proxy variables are jointly ?-mixing. We also prove the asymptotic validity of a residual-based moving block bootstrap (MBB) for inference on statistics that depend jointly on estimators for the VAR coefficients and for covariances of the VAR innovations and proxy variables. These statistics include structural impulse response functions (IRFs). Conversely, wild bootstraps are invalid, even when innovations and proxy variables are either independent and identically distributed or martingale difference sequences, and simulations show that their coverage rates for IRFs can be badly mis-sized. Using the MBB to re-estimate confidence intervals for the IRFs in Mertens and Ravn (2013), we show that inferences cannot be made about the effects of tax changes on output, labor, or investment.

Keywords: structural vector autoregression; tax shocks; fiscal policy; mixing; residual-based moving block bootstrap; wild bootstrap (search for similar items in EconPapers)
JEL-codes: H31 C32 C15 H3 H25 E62 H24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-mac, nep-ore and nep-pbe
Date: 2016-07-19, Revised 2016-07-19
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