Heterogeneity-robust granular instruments

Granular instrumental variables (GIV) has experienced sharp growth in empirical macro-finance. The methodology's rise showcases granularity's potential for identification in a wide set of economic environments, like the estimation of spillovers and demand systems. I propose a new estimator--called robust granular instrumental variables (RGIV)--that allows researchers to study unit-level heterogeneity in spillovers within GIV's framework. In contrast to GIV, RGIV also allows for unknown shock variances and does not require skewness of the size distribution of units. I also develop a test of overidentifying restrictions that evaluates RGIV's compatibility with the data, a parameter restriction test that evaluates the appropriateness of the homogeneous spillovers assumption, and extend the framework to allow for observable explanatory variables. Applied to the Euro area, I find strong evidence of country-level heterogeneity in sovereign yield spillovers. In simulations, I show that RGIV produces reliable and informative confidence intervals.