Making a Weak Instrument Set Stronger: Factor-Based Estimation of the Taylor Rule

Harun Mirza and Lidia Storjohann

No 13/2011, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: The problem of weak identification has recently attracted attention in the analysis of structural macroeconomic models. Using robust methods can result in large confidence sets making inference difficult. We overcome this problem in the analysis of a forward-looking Taylor rule by seeking stronger instruments. We suggest exploiting information from a large macroeconomic data set by generating factors and using them as additional instruments. This approach results in a stronger instrument set and hence smaller weak-identification robust confidence sets. It allows us to conclude that there has been a shift in monetary policy from the pre-Volcker regime to the Volcker-Greenspan tenure.

Keywords: Taylor Rule; Weak Instruments; Factor Models (search for similar items in EconPapers)
JEL-codes: C22 E31 E52 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bonedp:132012

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