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Testing for Strong Exogeneity in Proxy-VARS

Author

Listed:
  • Martin Bruns

    (School of Economics, University of East Anglia)

  • Sascha A. Keweloh

    (TU Dortmund University)

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 rational 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

  • Martin Bruns & Sascha A. Keweloh, 2023. "Testing for Strong Exogeneity in Proxy-VARS," University of East Anglia School of Economics Working Paper Series 2023-07, School of Economics, University of East Anglia, Norwich, UK..
    • Handle: RePEc:uea:ueaeco:2023-07
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    References listed on IDEAS

    as
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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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