Abstract
External sources of as-if randomness — that is, external instruments — can be used to identify the dynamic causal effects of macroeconomic shocks. One method is a one-step instrumental variables regression (local projections – IV); a more efficient two-step method involves a vector autoregression. We show that, under a restrictive instrument validity condition, the one-step method is valid even if the vector autoregression is not invertible, so comparing the two estimates provides a test of invertibility. If, however, lagged endogenous variables are needed as control variables in the one-step method, then the conditions for validity of the two methods are the same.
Original language | English (US) |
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Pages (from-to) | 917-948 |
Number of pages | 32 |
Journal | Economic Journal |
Volume | 128 |
Issue number | 610 |
DOIs | |
State | Published - May 2018 |
All Science Journal Classification (ASJC) codes
- Economics and Econometrics