Comparing external and internal instruments for vector autoregressions

Bruns, Martin and Lütkepohl, Helmut (2025) Comparing external and internal instruments for vector autoregressions. Journal of Economic Dynamics and Control, 177. ISSN 0165-1889

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Abstract

In conventional proxy VAR analysis, the shocks of interest are identified by external instruments. This is typically accomplished by considering the covariance of the instruments and the reduced-form residuals. Alternatively, the instruments may be internalized by augmenting the VAR process by the instruments or proxies. These alternative identification methods are compared and it is shown that the resulting shocks obtained with the alternative approaches differ in general. Conditions are provided under which their impulse responses are nevertheless identical. If the conditions are satisfied, identification of the shocks is ensured. An empirical example illustrates the theoretical results.

Item Type:	Article
Additional Information:	Martin Bruns thanks The British Academy for financial support, grant number TDA22﹨220046.
Uncontrolled Keywords:	augmented var,fundamental shocks,invertible var,proxy var,structural vector autoregression,economics and econometrics,control and optimization,applied mathematics ,/dk/atira/pure/subjectarea/asjc/2000/2002
Faculty \ School:	Faculty of Social Sciences > School of Economics
UEA Research Groups:	Faculty of Science > Research Groups > Statistics Faculty of Social Sciences > Research Groups > Applied Econometrics And Finance
Related URLs:	http://www.scopus.com/inward/record.url?...
Depositing User:	LivePure Connector
Date Deposited:	30 Jun 2025 10:30
Last Modified:	14 Jul 2025 12:32
URI:	https://ueaeprints.uea.ac.uk/id/eprint/99767
DOI:	10.1016/j.jedc.2025.105131

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