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Testing Conditional Independence in Macroeconomic Policy Evaluation for Time Series Data

Ying Fang, Ming Lin, Shengfang Tang and Zongwu Cai
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Ying Fang: The Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, Fujian 361005, China and Department of Statistics, School of Economics, Xiamen University, Xiamen, Fujian 361005, China
Ming Lin: The Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, Fujian 361005, China and Department of Statistics, School of Economics, Xiamen University, Xiamen, Fujian 361005, China
Shengfang Tang: Department of Statistics, School of Economics, Xiamen University, Xiamen, Fujian 361005, China
Zongwu Cai: Department of Economics, The University of Kansas, Lawrence, KS 66045, USA

No 202118, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: In this paper, we propose a new procedure to test conditional independence assumption for macroeconomic policy evaluation in a time series context. The unconfoundedness assumption is transformed to a nonparametric conditional moment test using auxiliary variables which are allowed to affect potential outcomes but the dependence can be fully captured by potential outcomes and observable controls. When the policy choice is binary, a nonparametric statistic test is developed further for testing the unconfoundedness assumption conditional on policy propensity score. The proposed test statistics are shown to have the limiting normal distribution under the null hypotheses for time series data. Monte Carlo simulations are conducted to examine the finite sample performances of the proposed test statistics. Finally, the proposed test method is applied to testing the conditional unconfoundedness in a real example as considered in Angrist and Kuersteiner (2011).

Keywords: Bootstrap; Macroeconomic policy evaluation; Moment test; Nonparametric estimation; Selection on observable; Treatment effect; Unconfoundedness assumption. (search for similar items in EconPapers)
JEL-codes: C12 C13 C14 C23 (search for similar items in EconPapers)
Date: 2021-09, Revised 2021-09
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-isf and nep-ore
References: View references in EconPapers View complete reference list from CitEc
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