Working Paper: CEPR ID: DP17640
Authors: Andrea Carriero; Massimiliano Marcellino; Tommaso Tornese
Abstract: We propose a blended approach which combines identification via heteroskedasticity with the widely used methods of sign restrictions, narrative restrictions, and external instruments. Since heteroskedasticity in the reduced form can be exploited to point identify a set of orthogonal shocks, its use results in a sharp reduction of the potentially large identified sets stemming from the typical approaches. Conversely, the identifying information in the form of sign and narrative restrictions or external instruments can prove necessary when the conditions for point identification through heteroskedasticity are not met and offers a natural solution to the labeling problem inherent in purely statistical identification strategies. As a result, we argue that blending these methods together resolves their respective key issues and leverages their advantages, which allows to sharpen identification at virtually no cost. We illustrate the blending approach using several examples taken from recent and influential literature. Specifically, we consider labour market shocks, oil market shocks, monetary and fiscal policy shocks, and find that their effects can be rather different from what previously obtained with simpler identification strategies.
Keywords: identification; heteroskedasticity; sign restrictions; proxy variables
JEL Codes: C11; C32; D81; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| blending identification methods (C52) | sharper identification of shocks (E32) |
| blending identification methods (C52) | steeper aggregate labor supply (J49) |
| blending identification methods (C52) | flatter demand curve (D11) |
| blending identification methods (C52) | more responsive wages to demand shocks (J39) |
| oil-specific demand shocks (Q43) | primary drivers of oil price changes (Q31) |
| oil-specific demand shocks (Q43) | marginal effect on global economic activity (F69) |
| monetary contraction (E59) | deeper recessive consequences (I14) |
| fiscal contractions (E62) | negatively affect output (F69) |