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Dynamic Identification Using System Projections on Instrumental Variables

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Abstract

We propose System Projections on Instrumental Variables (SP-IV) to estimate structural relationships using regressions of structural impulse responses obtained from local projections or vector autoregressions. Relative to IV with distributed lags of shocks as instruments, SP-IV imposes weaker exogeneity requirements and can improve efficiency and increase effective instrument strength relative to the typical 2SLS estimator. We describe inference under strong and weak identification. The SP-IV estimator outperforms other estimators of Phillips Curve parameters in simulations. We estimate the Phillips Curve implied by the main business cycle shock of Angeletos et al. (2020) and find that the impulse responses are consistent with weak but also relatively strong cyclical connections between inflation and unemployment.

Suggested Citation

  • Daniel J. Lewis & Karel Mertens, 2022. "Dynamic Identification Using System Projections on Instrumental Variables," Working Papers 2204, Federal Reserve Bank of Dallas, revised 03 Jul 2024.
    • Handle: RePEc:fip:feddwp:93894
    DOI: 10.24149/wp2204r3
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    1. Andrews,Donald W. K. & Stock,James H. (ed.), 2005. "Identification and Inference for Econometric Models," Cambridge Books, Cambridge University Press, number 9780521844413, November.
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    Cited by:

    1. Andrew J. Fieldhouse & Karel Mertens, 2023. "The Returns to Government R&D: Evidence from U.S. Appropriations Shocks," Working Papers 2305, Federal Reserve Bank of Dallas, revised 21 Nov 2024.
    2. Andrew J. Fieldhouse & Karel Mertens, 2025. "The Social Returns to Public R&D," NBER Chapters, in: Entrepreneurship and Innovation Policy and the Economy, volume 5, pages 9-39, National Bureau of Economic Research, Inc.

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    Keywords

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    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
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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