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Identification and Estimation of Dynamic Causal Effects in Macroeconomics Using External Instruments

Stock, James H., Watson, Mark W.·2018·The Economic Journal
DOI 10.1111/ecoj.12593
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Abstract

External sources of as‐if randomness — that is, external instruments — can be used to identify the dynamic causal effects of macroeconomic shocks. One method is a one‐step instrumental variables regression (local projections – IV); a more efficient two‐step method involves a vector autoregression. We show that, under a restrictive instrument validity condition, the one‐step method is valid even if the vector autoregression is not invertible, so comparing the two estimates provides a test of invertibility. If, however, lagged endogenous variables are needed as control variables in the one‐step method, then the conditions for validity of the two methods are the same.

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Metadata

Authors
Stock, J. H., & Watson, M. W.
Venue
The Economic Journal
Publisher
Oxford University Press (OUP)
Published
2018-05-01
Volume
128
Issue
610
Pages
917-948
ISSN
  • 0013-0133 (ISSN-L)
  • 1468-0297
DOI
10.1111/ecoj.12593
OpenAlex
W2784791315
Cited by
644
References
2
FWCI
82.20
Type
journal article
Language
en
Open access
closed
Licence

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Stock, J. H., & Watson, M. W. (2018). Identification and Estimation of Dynamic Causal Effects in Macroeconomics Using External Instruments. The Economic Journal. https://doi.org/10.1111/ecoj.12593

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