TY - JOUR
T1 - Instrumental Variable Identification of Dynamic Variance Decompositions
AU - Plagborg-Møller, Mikkel
AU - Wolf, Christian K.
N1 - Funding Information:
Giorgio Primiceri, Eric Renault, Giovanni Ricco, Luca Sala, Jón Steinsson, Jim Stock, Mark Watson, and seminar participants at several venues. The first draft of this paper was written while Wolf was visiting the Bundesbank, whose hospitality is gratefully acknowledged. Wolf also acknowledges support from the Alfred P. Sloan Foundation and the Macro Financial Modeling Project. Plagborg-Møller acknowledges that this material is based upon work supported by the NSF (National Science Foundation) under grant no. 1851665. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the NSF. Replication files are provided as supplementary material online. This paper was edited by Harald Uhlig.
Publisher Copyright:
© 2022 The University of Chicago. All rights reserved.
PY - 2022/8
Y1 - 2022/8
N2 - 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 structural vector auto-regression analysis, our methods do not require invertibility. Applied to US data, they give a tight upper bound on the importance of monetary shocks for inflation dynamics.
AB - 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 structural vector auto-regression analysis, our methods do not require invertibility. Applied to US data, they give a tight upper bound on the importance of monetary shocks for inflation dynamics.
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U2 - 10.1086/720141
DO - 10.1086/720141
M3 - Article
AN - SCOPUS:85131551757
SN - 0022-3808
VL - 130
SP - 2164
EP - 2202
JO - Journal of Political Economy
JF - Journal of Political Economy
IS - 8
ER -