Instrumental Variable Identification of Dynamic Variance Decompositions

Mikkel Plagborg-Møller and Christian Wolf
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Mikkel Plagborg-Møller: Princeton University
Authors registered in the RePEc Author Service: Mikkel Plagborg-Moller

Working Papers from Princeton University. Economics Department.

Abstract: Macroeconomists increasingly use external sources of exogenous variation for causal inference. However, unless such external instruments (proxies) capture the underlying shock without measurement error, existing methods are silent on the importance of that shock for macroeconomic fluctuations. We show that, in a general moving average model with external instruments, variance decompositions for the instrumented shock are interval-identified, with informative bounds. Various additional restrictions guarantee point identification of both variance and historical decompositions. Unlike SVAR analysis, our methods do not require invertibility. Applied to U.S. data, they give a tight upper bound on the importance of monetary shocks for inflation dynamics.

Keywords: external instrument; impulse response function; invertibility; proxy variable; variance decomposition (search for similar items in EconPapers)
JEL-codes: C32 C36 (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://scholar.princeton.edu/sites/default/files/decomp_iv.pdf

Related works:
Journal Article: Instrumental Variable Identification of Dynamic Variance Decompositions (2022)
Working Paper: Instrumental Variable Identification of Dynamic Variance Decompositions (2021)
Working Paper: Instrumental Variable Identification of Dynamic Variance Decompositions (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2021-40

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