DP13853 Identification with External Instruments in Structural VARs under Partial Invertibility

Author(s):	Silvia Miranda-Agrippino, Giovanni Ricco
Publication Date:	July 2019
Keyword(s):	Identification with External Instruments, Invertibility, monetary policy shocks, structural VAR
JEL(s):	C32, C36, E30, E52
Programme Areas:	Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=13853

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.