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US fiscal policy shocks: Proxy‐SVAR overidentification via GMM

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  • Allan W. Gregory
  • James McNeil
  • Gregor W. Smith

Abstract

Using external instruments, one can recover the effects of individual shocks without fully identifying a vector autoregression (VAR). We show that fully or almost fully instrumenting a VAR—that is, using an instrument for each shock—allows one to overidentify the model by incorporating the condition that the structural shocks are uncorrelated, via the generalized method of moments (GMM). We apply our approach to a fiscal VAR for the United States over 1948–2019, where the overidentifying restrictions are not rejected. The overidentified structural vector autoregression (SVAR) yields (a) greater precision in estimating impulse response functions and multipliers and (b) measures of the effects of nonfiscal shocks even when there is no instrument for them.

Suggested Citation

  • Allan W. Gregory & James McNeil & Gregor W. Smith, 2024. "US fiscal policy shocks: Proxy‐SVAR overidentification via GMM," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(4), pages 607-619, June.
    • Handle: RePEc:wly:japmet:v:39:y:2024:i:4:p:607-619
    DOI: 10.1002/jae.3038
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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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