Dynamic Identification Using System Projections on Instrumental Variables

Lewis, Daniel J.; Mertens, Karel

doi:10.24149/wp2204r3

Working Paper Revision

Dynamic Identification Using System Projections on Instrumental Variables

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.

Keywords: Structural Equations; Instrumental Variables; Impulse Responses; Robust Inferences; Phillips Curve; Inflation Dynamics;

JEL Classification: C32; C36; E3;

https://doi.org/10.24149/wp2204r3