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Identification with External Instruments in Structural VARs under Partial Invertibility

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  • Agrippino, Silvia Miranda
  • Ricco, Giovanni

Abstract

This paper discusses the conditions for identification in SVAR-IVs when only the shock of interest or a subset of the structural shocks can be recovered as a linear combination of the VAR residuals. This condition of partial invertibility is very general, often of empirical relevance, and less stringent than the standard full invertibility that is routinely assumed in the SVAR literature. We show that, under partial invertibility, the dynamic responses can be correctly recovered using an external instrument even when this correlates with leads and lags of other invertible shocks. We call this a limited lead-lag exogeneity condition. We evaluate our results in a simulated environment, and provide an empirical application to the case of monetary policy shocks.

Suggested Citation

  • Agrippino, Silvia Miranda & Ricco, Giovanni, 2019. "Identification with External Instruments in Structural VARs under Partial Invertibility," CEPR Discussion Papers 13853, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13853
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    References listed on IDEAS

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    1. Altavilla, Carlo & Brugnolini, Luca & Gürkaynak, Refet S. & Motto, Roberto & Ragusa, Giuseppe, 2019. "Measuring euro area monetary policy," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 162-179.
    2. Domenico Giannone & Lucrezia Reichlin, 2006. "Does information help recovering structural shocks from past observations?," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 455-465, 04-05.
    3. Ryan Chahrour & Kyle Jurado, 2017. "Recoverability," Boston College Working Papers in Economics 935, Boston College Department of Economics.
    4. Ricco, Giovanni & Callegari, Giovanni & Cimadomo, Jacopo, 2016. "Signals from the government: Policy disagreement and the transmission of fiscal shocks," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 107-118.
    5. Silvia Miranda-Agrippino & Giovanni Ricco, 2015. "The Transmission of Monetary Policy Shocks," Discussion Papers 1711, Centre for Macroeconomics (CFM), revised Feb 2017.
    6. Forni, Mario & Gambetti, Luca, 2014. "Sufficient information in structural VARs," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 124-136.
    7. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
    8. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2007. "Assessing Structural VARs," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 1-106, National Bureau of Economic Research, Inc.
    9. Miranda-Agrippino, Silvia & Hacıoglu Hoke, Sinem, 2018. "When creativity strikes: news shocks and business cycle fluctuations," LSE Research Online Documents on Economics 90381, London School of Economics and Political Science, LSE Library.
    10. Rabah Arezki & Valerie A. Ramey & Liugang Sheng, 2017. "News Shocks in Open Economies: Evidence from Giant Oil Discoveries," The Quarterly Journal of Economics, Oxford University Press, vol. 132(1), pages 103-155.
    11. Fabio Canova & Filippo Ferroni, 2018. "Mind the gap! Stylized dynamic facts and structural models," Working Papers No 13/2018, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    12. Altavilla, Carlo & Brugnolini, Luca & Gürkaynak, Refet S. & Motto, Roberto & Ragusa, Giuseppe, 2019. "Measuring euro area monetary policy," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 162-179.
    13. Braun, Phillip A. & Mittnik, Stefan, 1993. "Misspecifications in vector autoregressions and their effects on impulse responses and variance decompositions," Journal of Econometrics, Elsevier, vol. 59(3), pages 319-341, October.
    14. Pascal Paul, 2017. "The Time-Varying Effect of Monetary Policy on Asset Prices," Working Paper Series 2017-9, Federal Reserve Bank of San Francisco, revised 02 Jan 2018.
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    Citations

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    Cited by:

    1. Silvia Miranda-Agrippino & Sinem Hacioglu Hoke & Kristina Bluwstein, 2018. "When Creativity Strikes: News Shocks and Business Cycle Fluctuations," Discussion Papers 1823, Centre for Macroeconomics (CFM).
    2. Hacioglu Hoke, Sinem, 2019. "Macroeconomic effects of political risk shocks," Bank of England working papers 841, Bank of England.
    3. Andrea Giovanni Gazzani & Alejandro Vicondoa, 2019. "Proxy-SVAR as a Bridge for Identification with Higher Frequency Data," 2019 Meeting Papers 855, Society for Economic Dynamics.
    4. Adam Brzezinski & Yao Chen & Nuno Palma & Felix Ward, 2019. "The real effects of money supply shocks: Evidence from maritime disasters in the Spanish Empire," The School of Economics Discussion Paper Series 1906, Economics, The University of Manchester.
    5. Fabio Canova & Filippo Ferroni, 2018. "Mind the gap! Stylized dynamic facts and structural models," Working Papers No 13/2018, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    6. Mirela Miescu & Haroon Mumtaz, 2019. "Proxy structural vector autoregressions, informational sufficiency and the role of monetary policy," Working Papers 280730188, Lancaster University Management School, Economics Department.
    7. Mirela S. Miescu & Haroon Mumtaz, 2019. "Proxy structural vector autoregressions, informational sufficiency and the role of monetary policy," Working Papers 894, Queen Mary University of London, School of Economics and Finance.

    More about this item

    Keywords

    Identification with External Instruments; Invertibility; monetary policy shocks; structural VAR;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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