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Testing for strong exogeneity in Proxy-VARs

Author

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  • Bruns, Martin
  • Keweloh, Sascha A.

Abstract

Proxy variables have gained widespread prominence as indispensable tools for identifying structural VAR models. Analogous to instrumental variables, proxies need to be exogenous, i.e. uncorrelated with all non-target shocks. Assessing the exogeneity of proxies has traditionally relied on economic arguments rather than statistical tests. We argue that the economic rationale underlying the construction of commonly used proxy variables aligns with a stronger form of exogeneity. Specifically, proxies are typically constructed as variables not containing any information on the expected value of non-target shocks. We show conditions under which this enhanced concept of proxy exogeneity is testable without additional identifying assumptions.

Suggested Citation

  • Bruns, Martin & Keweloh, Sascha A., 2024. "Testing for strong exogeneity in Proxy-VARs," Journal of Econometrics, Elsevier, vol. 245(1).
    • Handle: RePEc:eee:econom:v:245:y:2024:i:1:s0304407624002215
    DOI: 10.1016/j.jeconom.2024.105876
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    More about this item

    Keywords

    Structural vector autoregression; Proxy VAR; Exogeneity test;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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