Causal Effects of Monetary Shocks: Semiparametric Conditional Independence Tests with a Multinomial Propensity Score

69 Pages Posted: 4 Aug 2008

See all articles by Joshua D. Angrist

Joshua D. Angrist

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Guido M. Kuersteiner

Boston University - Department of Economics

Abstract

Macroeconomists have long been concerned with the causal effects of monetary policy. When the identification of causal effects is based on a selection-on-observables assumption, non-causality amounts to the conditional independence of outcomes and policy changes. This paper develops a semiparametric test for conditional independence in time series models linking a multinomial policy variable with unobserved potential outcomes. Our approach to conditional independence testing is motivated by earlier parametric tests, as in Romer and Romer (1989, 1994, 2004). The procedure developed here is semiparametric in the sense that we model the process determining the distribution of treatment - the policy propensity score - but leave the model for outcomes unspecified. A conceptual innovation is that we adapt the cross-sectional potential outcomes framework to a time series setting. This leads to a generalized definition of Sims (1980) causality. A technical contribution is the development of root-T consistent distribution-free inference methods for full conditional independence testing, appropriate for dependent data and allowing for first-step estimation of the propensity score.

Keywords: monetary policy, propensity score, multinomial treatments, causality

JEL Classification: E52, C22, C31

Suggested Citation

Angrist, Joshua and Kuersteiner, Guido, Causal Effects of Monetary Shocks: Semiparametric Conditional Independence Tests with a Multinomial Propensity Score. IZA Discussion Paper No. 3606. Available at SSRN: https://ssrn.com/abstract=1184014 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Joshua Angrist (Contact Author)

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IZA Institute of Labor Economics

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Guido Kuersteiner

Boston University - Department of Economics ( email )

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