Granular Instrumental Variables

Xavier Gabaix and Ralph Koijen

No 28204, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a new way to construct instruments in a broad class of economic environments. In the economies we study, a few large firms, industries or countries account for an important share of economic activity. As the idiosyncratic shocks from these large players affect aggregate outcomes, they are valid and often powerful instruments. We provide a methodology to extract idiosyncratic shocks from the data and create “granular instrumental variables” (GIVs), which are size-weighted sums of idiosyncratic shocks. These GIVs allow us to then estimate parameters of interest, including causal elasticities and multipliers. We illustrate the idea in a basic supply and demand framework. GIVs provide a novel approach to identify both supply and demand elasticities based on idiosyncratic shocks to either supply or demand. We then show how to extend the basic procedure to cover a range of empirically relevant situations. As an application, we measure how “sovereign yield shocks” transmit across countries in the Eurozone. We sketch how GIVs could be useful to estimate a host of other causal parameters in economics.

JEL-codes: C01 E0 F0 G0 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-ecm and nep-mac
Note: AP CF EFG IFM IO LS ME
References: Add references at CitEc
Citations: View citations in EconPapers (26)

Published as Xavier Gabaix & Ralph S. J. Koijen, 2024. "Granular Instrumental Variables," Journal of Political Economy, vol 132(7), pages 2274-2303.

Downloads: (external link)
http://www.nber.org/papers/w28204.pdf (application/pdf)

Related works:
Working Paper: Granular Instrumental Variables (2020)
Working Paper: Granular Instrumental Variables (2020)
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:nbr:nberwo:28204

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w28204

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().