Premium
Making Weak Instrument Sets Stronger: Factor‐Based Estimation of Inflation Dynamics and a Monetary Policy Rule
Author(s) -
MIRZA HARUN,
STORJOHANN LIDIA
Publication year - 2014
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12120
Subject(s) - taylor rule , inflation (cosmology) , new keynesian economics , monetary policy , identification (biology) , economics , phillips curve , econometrics , inference , set (abstract data type) , macroeconomics , keynesian economics , computer science , central bank , artificial intelligence , theoretical physics , physics , botany , biology , programming language
The problem of weak identification has recently attracted attention in the analysis of structural macroeconomic models. Using robust methods can result in large confidence sets making precise inference difficult. We overcome this problem in the analysis of the hybrid New Keynesian Phillips Curve and a forward‐looking Taylor rule by employing stronger instruments. We suggest exploiting information from a large macroeconomic data set by generating factors and using them as additional instruments. This approach results in stronger instrument sets and hence smaller weak‐identification robust confidence sets. It allows us to conclude that there has been a shift toward more active monetary policy from the pre‐Volcker regime to the Volcker–Greenspan tenure.