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Title: Identification with External Instruments in Structural VARs under Partial Invertibility

Author(s): Silvia Miranda Agrippino and Giovanni Ricco

Publication Date: July 2019

Keyword(s): Identification with External Instruments, Invertibility, monetary policy shocks and structural VAR

Programme Area(s): Monetary Economics and Fluctuations

Abstract: This paper discusses the conditions for identification in SVAR-IVs when only the shock of interest or a subset of the structural shocks can be recovered as a linear combination of the VAR residuals. This condition of partial invertibility is very general, often of empirical relevance, and less stringent than the standard full invertibility that is routinely assumed in the SVAR literature. We show that, under partial invertibility, the dynamic responses can be correctly recovered using an external instrument even when this correlates with leads and lags of other invertible shocks. We call this a limited lead-lag exogeneity condition. We evaluate our results in a simulated environment, and provide an empirical application to the case of monetary policy shocks.

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Bibliographic Reference

Agrippino, S and Ricco, G. 2019. 'Identification with External Instruments in Structural VARs under Partial Invertibility'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13853