Paper #1659

Title:

Identifying modern macro equations with old shocks

Authors:

Régis Barnichon and Geert Mesters

Date:

May 2019

Abstract:

Despite decades of research, the consistent estimation of structural forward looking macroeconomic equations remains a formidable empirical challenge because of pervasive endogeneity issues. Prominent cases |the estimation of Phillips curves, of Euler equations for consumption or output, or of monetary policy rules| have typically relied on using pre-determined variables as instruments, with mixed success. In this work, we propose a new approach that consists in using sequences of independently identied structural shocks as instrumental variables. Our approach is robust to weak instruments and is valid regardless of the shocks' variance contribution. We estimate a Phillips curve using monetary shocks as instruments and nd that conventional methods (i) substantially under-estimate the slope of the Phillips curve and (ii) over-estimate the role of forward-looking in ation expectations.

Keywords:

Structural equations, instrumental variables, impulse responses, robust inference.

JEL codes:

C14, C32, E32, E52.

Area of Research:

Macroeconomics and International Economics

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