Identification with external instruments in structural VARs

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 14 April 2022

Staff Working Paper No. 973

By Silvia Miranda-Agrippino and Giovanni Ricco

IV methods have become the leading approach to identify the effects of macroeconomic shocks. Conditions for identification generally involve all the shocks in the VAR even when only a subset of them is of interest. This paper provides more general conditions that only involve the shocks of interest and the properties of the instrument of choice. We introduce a heuristic and a formal test to guide the specification of the empirical models, and provide formulas for the bias when the conditions are violated. We apply our results to the study of the transmission of conventional and unconventional monetary policy shocks.

Identification with external instruments in structural VARs

 

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