A0919
Title: Identifying proxy VARs with restrictions on the forecast error variance
Authors: Tilmann Haertl - University of Konstanz (Germany) [presenting]
Abstract: The proxy VAR framework requires additional restrictions to disentangle the structural shocks when multiple shocks are identified using multiple instruments. The employment of restrictions on the forecast error variance (FEV) is proposed. Less restrictive assumptions that bound the contributions to the FEV can replace or accompany inequality restrictions on e.g. the impulse responses. This enables sharpening the set identification of the structural parameters. Furthermore, assuming one shock maximizes the contribution to the FEV of a target variable (Max-Share) can be used to identify the structural parameters. It is shown under which circumstances this strategy succeeds and an augmentation to the Max-Share framework is proposed in cases it is prone to bias concerns. Point identification is achieved without the need for strict equality restrictions, but is limited to the case of two proxies which identify two shocks.
