Identifying Structural Vars with a Proxy Variable and a Test for a Weak Proxy

33 Pages Posted: 7 Dec 2015

See all articles by Kurt G. Lunsford

Kurt G. Lunsford

Federal Reserve Bank of Cleveland

Date Written: 2015-12-04

Abstract

This paper develops a simple estimator to identify structural shocks in vector autoregressions (VARs) by using a proxy variable that is correlated with the structural shock of interest but uncorrelated with other structural shocks. When the proxy variable is weak, modeled as local to zero, the estimator is inconsistent and converges to a distribution. This limiting distribution is characterized, and the estimator is shown to be asymptotically biased when the proxy variable is weak. The F statistic from the projection of the proxy variable onto the VAR errors can be used to test for a weak proxy variable, and the critical values for different VAR dimensions, levels of asymptotic bias, and levels of statistical significance are provided. An important feature of this F statistic is that its asymptotic distribution does not depend on parameters that need to be estimated.

Keywords: F Statistic, Productivity Shocks, Proxy Variable, Structural Vector Autoregression, TFP, Weak IV

JEL Classification: C12, C13, C32, C36, O47

Suggested Citation

Lunsford, Kurt G., Identifying Structural Vars with a Proxy Variable and a Test for a Weak Proxy (2015-12-04). FRB of Cleveland Working Paper No. 1528, Available at SSRN: https://ssrn.com/abstract=2699452

Kurt G. Lunsford (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
190
Abstract Views
894
Rank
287,983
PlumX Metrics