Robust Inference in Models Identified via Heteroskedasticity
32 Pages Posted: 22 Dec 2018 Last revised: 14 Aug 2019
Date Written: December 1, 2018
Identification via heteroskedasticity exploits differences in variances across regimes to identify parameters in simultaneous equations. I study weak identification in such models, which arises when variances change very little or the variances of multiple shocks change close to proportionally. I show that this causes standard inference to become unreliable, outline two tests to detect weak identification, and establish conditions for the validity of nonconservative methods for robust inference on an empirically relevant subset of the parameter vector. I apply these tools to monetary policy shocks, identified using heteroskedasticity in high frequency data. I detect weak identification in daily data, causing standard inference methods to be invalid. However, using intraday data instead allows the shocks to be strongly identified.
Keywords: heteroskedasticity, weak identification, robust inference, pretesting, monetary policy, impulse response function
JEL Classification: C12, C32, C36, E43
Suggested Citation: Suggested Citation