Testing for strong exogeneity in Proxy-VARs

Bruns, Martin and Keweloh, Sascha A. (2024) Testing for strong exogeneity in Proxy-VARs. Journal of Econometrics, 245 (1-2). ISSN 0304-4076

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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.

Item Type:	Article
Additional Information:	Funding information: Martin Bruns thanks the British Academy for financial support, grant number TDA22\220046.
Faculty \ School:	Faculty of Social Sciences > School of Economics
UEA Research Groups:	Faculty of Social Sciences > Research Groups > Applied Econometrics And Finance
Depositing User:	LivePure Connector
Date Deposited:	16 Oct 2024 12:30
Last Modified:	20 Nov 2024 14:30
URI:	https://ueaeprints.uea.ac.uk/id/eprint/97045
DOI:	10.1016/j.jeconom.2024.105876

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