identification approaches narrative approach – look for exogenous movements in spending – many...
Post on 19-Dec-2015
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Identification approaches
• Narrative approach– Look for exogenous movements in spending– Many of issues of timing, endogeneity with
monetary policy and tax dates do not arise– Build-up dummies can be included directly as
shocks in single equation or systems
Identification approaches
• VAR approach– “Structural approach”
•Wold causal chain• Caution: Testing of identifying restrictions a no-no•Need to maintain causal ordering
– Identifying restriction•Government spending does not respond
contemporaneously to other variables•Mechanically: Ordered “first” in VAR
Identification approaches
• Exogenous variation, final form regression– Aggregate, esp. miliary spending
•Hall, Barro, etc
– State/regional/small country• Flurry of recent work
• Estimating equation
1 1
1 1
t t t tt
t t
z z g g
y y
VAR example
11 1 12 2 1 21 1 22 2 2... ...t t t k t k t t k t k gtg a g a g a g a y a y a y
11 1 12 2 1 21 1 22 2 2... ...t t t k t k t t k t k g gt yty b g b g b g b y b y b y
Estimate equation by equation
Orthogonalize by putting residual from first equation into second equation (“Cholesky decomposition”)
Economics/Identification: Government spending does not respond contemporaneously to output
VAR with exogenous variable example
Ramey-Shapiro dummy (exogenous)td
10 11 1 12 2 1 21 1 22 2 2... ...t t t t k t k t t k t k yty c d c d c d c d c y c y c y
Identification approaches
• Narrative approach– Look for exogenous movements in spending– Many of issues of timing, endogeneity with
monetary policy and tax dates do not arise– Build-up dummies can be included directly as
shocks in single equation or systems
Identification approaches
• VAR approach– “Structural approach”
•Wold causal chain• Caution: Testing of identifying restrictions a no-no•Need to maintain causal ordering
– Identifying restriction•Government spending does not respond
contemporaneously to other variables•Mechanically: Ordered “first” in VAR
Identification approaches
• Exogenous variation, final form regression– Aggregate, esp. miliary spending
•Hall, Barro, etc
– State/regional/small country• Flurry of recent work
• Estimating equation
1 1
1 1
t t t tt
t t
z z g g
y y