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Innovations Meet Narratives -Improving the Power-Credibility Trade-off in Macro

Author

Listed:
  • Geert Mesters
  • Régis Barnichon

Abstract

In macro, instances of clear and indisputable exogenous variation are rare and researchers often face a difficult trade-off between credibility and efficiency. In this work, we introduce a new method -innovation-powered IV-, which allows to reduce the confidence intervals of a credible but low power identification scheme (e.g., a narrative instrument) by leveraging the high power of a possibly misspecified parametric identification assumption (e.g., a short run restriction). The method delivers large reductions in confidence intervals for the causal effects of monetary and fiscal policy, with gains of around 40 percent compared to state of the art narratively-identified estimates.

Suggested Citation

  • Geert Mesters & Régis Barnichon, 2025. "Innovations Meet Narratives -Improving the Power-Credibility Trade-off in Macro," Working Papers 1475, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1475
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    More about this item

    Keywords

    Monetary and Fiscal Policy; missing data; time series identification; narrative identification;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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