Qualitative versus Quantitative External Information for Proxy Vector Autoregressive Analysis

46 Pages Posted: 9 Apr 2021

See all articles by Lukas Boer

Lukas Boer

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin

Helmut Lütkepohl

Free University of Berlin (FUB)

Date Written: March 2021

Abstract

A major challenge for proxy vector autoregressive analysis is the construction of a suitable external instrument variable or proxy for identifying a shock of interest. Some authors construct sophisticated proxies that account for the dating and size of the shock while other authors consider simpler versions that use only the dating and signs of particular shocks. It is shown that such qualitative (sign-)proxies can lead to impulse response estimates of the impact effects of the shock of interest that are nearly as efficient as or even more efficient than estimators based on more sophisticated quantitative proxies that also reflect the size of the shock. Moreover, the sign-proxies tend to provide more precise impulse response estimates than an approach based merely on the higher volatility of the shocks of interest on event dates.

Keywords: GMM, heteroskedastic VAR, instrumental variable estimation, proxy VAR, structural vector autoregression

JEL Classification: C32

Suggested Citation

Boer, Lukas and Lütkepohl, Helmut, Qualitative versus Quantitative External Information for Proxy Vector Autoregressive Analysis (March 2021). DIW Berlin Discussion Paper No. 1940, Available at SSRN: https://ssrn.com/abstract=3821426 or http://dx.doi.org/10.2139/ssrn.3821426

Lukas Boer (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, Berlin 10099
Germany

Helmut Lütkepohl

Free University of Berlin (FUB)

Otto Suhr Institut for Political Science\
Ihnestrasse 21
Berlin
Germany

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